German manufacturing in "free fall" says Ifo Institute report
Morale amongst businesses and industry in Europe's largest economy is at a six year low, according to a survey conducted by the Ifo Institute. It's a further sign that a looming manufacturing crisis is bringing Germany further towards a recession.
The figures tell a concerning story for the export-reliant economy, which has been already damaged by a drop in foreign demand, uncertainty over Brexit and trade disputes with the US.
The Ifo institute said its business climate index fell to 95.7 from an upwardly revised 97.5 in June. The July reading undershot a consensus forecast for 97.1. It was the fourth monthly decline in a row and the lowest level since April 2013.
"The most important German economic indicator suggests that the German economy is heading towards a recession," VP Bank analyst Thomas Gitzel said.
Germany's GDP is widely expected to have shrunk in the second quarter after a solid 0.4% quarter-on-quarter expansion in the first three months. Another quarter of economic contraction would be a technical recession.
Ifo President Clemens Fuest said the German economy was going through difficult times as companies were less satisfied with their current business situation and were also looking to the future with increased scepticism.
"In manufacturing, the business climate indicator is in free fall," Fuest said, with the sub-index for the goods producing sector posting its biggest drop since February 2009.
There are also signs that the recession in manufacturing is beginning to encroach into other sectors. The Ifo figures also showed that business morale also showed a decline in services and trade.
The only sector that had shown any signs of optimism was the construction sector.
The Ifo figures chimed with a survey among purchasing managers released on Wednesday that showed the recession in manufacturing worsened in July with the performance of German goods producers dropping to the lowest level in seven years.
Ifo economist Klaus Wohlrabe told Reuters that the manufacturing recession was spreading across the broader industrial sector.
"Private consumption remains a pillar of support, but employment growth continues to weaken," Wohlrabe said, adding that domestic demand should nonetheless provide a bulwark against trade-related headwinds in the coming months.
"However, no major gains are expected in the second half of the year either. Because with Boris Johnson and his cabinet, we have an increased probability of a hard Brexit," he said.
Exporters in Germany are also worried that an escalating trade dispute between the United States and China could hurt their business. U.S. President Donald Trump's threat to impose higher import tariffs on European cars is causing concern too.
"Germany is in a grey area between a marked growth slowdown and a recession," Commerzbank economist Joerg Kraemer said, adding that the Ifo figures would feed into the wider debate about how the European Central Bank (ECB) should react.
"The ECB is very likely to ease its monetary policy considerably, if not as we expect today, then by September at the latest," Kraemer said.
ECB policymakers are all but certain to ease monetary policy further. The biggest question is whether it staggers its moves over a longer period of time or opts for a big bang.
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