The business climate in Germany worsened in June

This article was originally published on English language

Sentiment among German companies fell more than expected in June, marking the first drop since December 2023, the ifo Institute for Economic Research reported.

The monthly survey of about 9,000 German companies in manufacturing, services, trade and construction showed that the business climate index fell from 89.3 points in May to 88.6 in June, missing economists’ expectations of a rise to 89.7.

The overall decline in confidence was caused primarily by worsening business expectations for the next six months. The index of expectations fell from 90.4 points in May to 89 in June. The current conditions index remained unchanged at 88.3, ​​missing the 88.5 expected.

The index of business activity in the manufacturing sector fell after three months of improvement, with companies becoming more cautious about the future.

In the service sector, the index increased. Service providers assessed their situation more positively, and the outlook for the second half of the year also continued to improve.

In trade, the business climate has deteriorated significantly due to growing skepticism about the future. In the construction sector, on the contrary, the index rose slightly thanks to less pessimistic expectations, although the lack of orders is still the main problem.

“The German economy is struggling to overcome stagnation,” writes ifo.

Germany’s economic outlook has improved slightly

Last week, the ifo Institute slightly raised the forecast for economic growth in Germany in the second half of 2024.

For the whole of 2024, the German Institute for Economic Research predicts growth of 0.4% (in 2023 there was a reduction of 0.2%). This indicator is 0.2 percentage points higher than the forecast for spring 2024. Meanwhile, Germany’s economy is forecast to grow by 1.5% in 2025, in line with previous estimates.

Inflation is forecast to reach 2.2% in 2024 and decline to 1.7% in 2025.

According to ifo, the economy is supported by the manufacturing industry with its export business, while the construction sector is likely to continue its downward trend and experience a strong recession.

“The German economy is gradually coming out of the crisis. There are new hopes,” the head of ifo’s forecasting department, Professor Tima Vollmershäuser, is convinced.

Euro 2024 will not be a turning point an event

“The European football championship in Germany will not be a ‘summer fairy tale’ for the German economy,” said an ifo study published earlier this month.

According to forecasts, Euro 2024 will bring income to Germany, thanks to the influx of soccer tourists from abroad. According to ifo’s latest economic forecast, this is roughly 0.1% of economic output in the second quarter of the year.

However, according to the ifo institute, from a macroeconomic point of view, such major events usually have a limited impact, except in the field of tourism.

“Although domestic consumers will spend more in the hospitality sector and food retail during the championship, they will reduce their spending in other sectors, so that private consumption as a whole is likely to remain unchanged. At least, this is what the experience of the FIFA World Cup suggests 2006,” said Professor Vollmershäuser.

Ifo researcher Jerome Wolff noted: “This effect will be short-lived, meaning that service exports driven by tourists returning home after Euro 2024 are likely to fall again in the third quarter and generally remain flat.”

Market reaction

German assets showed minimal reaction to the release of business climate data from ifo.

Bond yields were flat at 2.4% during a relatively busy trading session on Monday morning.

The DAX rose 0.7% by 10:30 a.m. CET, recovering from a 0.5% drop on Friday, led by gains in the auto sector. Porsche AG, BMW, Volkswagen and Mercedes-Benz AG rose 3.2%, 3%, 2.2% and 1.8%, respectively.

Among the other leaders are Puma and Fresenius Medical Care (growth by 2.1% and 2.4%, respectively).