German business morale declined in January, signalling prolonged economic challenges

German economy: German business morale has declined for the second consecutive month in January, pointing to ongoing challenges for Europe's largest economy. The Ifo Institute reported that its business climate index fell to 85.2, down from a slightly revised 86.3 in December. Analysts had anticipated an improvement to 86.7, but the reality signals that the German economy continues to grapple with a recession.

"The German economy is stuck in recession," remarked Clemens Fuest, president of Ifo. Germany's gross domestic product (GDP) contracted by 0.3 per cent in 2023, further contributing to concerns about the nation's economic outlook. ING economist Carsten Brzeski predicts another shallow recession in 2024, with a forecasted contraction of -0.3 per cent.

Challenges from high inflation 

Persistent challenges from high inflation, elevated energy prices, and weakened foreign demand plagued Germany in the previous year. A budget crisis resulted in substantial subsidy cuts, creating additional strain on the coalition government. Ongoing disruptions in trade, attributed to Houthi attacks on shipping in the Red Sea, have added fresh concerns for Germany's export industry. The composite PMI index, a closely watched indicator, fell for the seventh consecutive month in January.

While these challenges persist, Klaus Wohlrabe, Ifo's head of surveys, noted that supply chains have remained robust in the face of Red Sea attacks, preventing significant disruptions to the flow of raw materials and primary products.

Additonal hurdles

As the new year unfolds, Germany faces additional hurdles, including mass farmer protests and nationwide rail strikes reflecting growing discontent with Chancellor Olaf Scholz's economic policies. The Ifo recently revised down its growth estimate, forecasting a meagre 0.7 per cent rebound in the economy for the year. Other data released on Thursday revealed a 7.4 per cent month-on-month decline in incoming orders for Germany's construction industry in November, signalling challenges for the struggling property sector.

Economists, including Joerg Kraemer of Commerzbank, caution that the outlook remains challenging, with many still too optimistic. The Ifo's current assessment and expectations components, derived from a survey of approximately 9,000 managers, also dimmed in January, reflecting the prevailing uncertainties and unfavourable economic conditions.

"Unfavourable location conditions and unsettling economic policy are major problems," added Alexander Krueger of Hacuk Aufhaeuser Lampe, emphasising the persistent hurdles faced by the German business climate.

(with Reuters inputs)