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BUSINESS & INDUSTRY

Fears of a recession in Germany grow as business confidence falls

Germany's business climate deteriorated sharply in September, according to a key survey published Monday, the latest sign that Europe's top economy is heading for recession as it faces an energy crisis.

Published: 26 September 2022 12:34 CEST

People walk on a shopping street in central Cologne. Photo: picture alliance/dpa | Oliver Berg

The Ifo institute’s monthly confidence barometer, based on a survey of about 9,000 companies, slipped 4.3 points to 84.3 from the previous month.

It was the fourth straight month of contraction, taking the indicator to its lowest level since May 2020, with the decline felt across the economy, from manufacturing to the service sector.

“The German economy is slipping into recession,” said Ifo president Clemens Fuest.

“Pessimism regarding the coming months has grown decidedly.”

Germany is facing soaring inflation, particularly of energy prices, after Russia cut gas supplies through a key pipeline as tensions mount over the Ukraine war.

While all of Europe is affected, Germany has been hard hit as it was heavily reliant on Russian supplies prior to the war.

A recession in Germany was now “inevitable”, said ING analyst Carsten Brzeski, pointing to “high inflation, surging energy prices, ongoing supply chain frictions and weakening global demand”.

In the survey, confidence in the manufacturing sector — a driver of the German economy – fell particularly sharply, recording a drop of 14.2 points.

Businesses’ assessment of the current situation also fell 3.0 points to 94.5 points.

The barometer was the latest warning that Germany is heading for a contraction, with the OECD also forecasting Monday that Europe’s economic powerhouse would shrink next year.

German GDP grew a slight 0.1 percent between April and June.

Inflation rose at a 7.9-percent rate in Germany in August, well above the two-percent target of the European Central Bank.

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Intel’s delay

The US chip giant announced Monday it is postponing plans for its project in Germany for two years as it focuses more on the United States.

This is a blow to Berlin, which had pledged 10 billion euros ($11 billion) – a third of the cost – to build the production plant in the eastern city of Magdeburg.

While Intel’s own struggles are the immediate cause for the delay, it has also fuelled concerns that Germany is becoming less attractive as a place to do business.

In this year’s ranking of the most competitive economies by Swiss business school IMD, Germany slipped two spots to 24th, with taxes, bureaucracy and poor infrastructure cited as major handicaps.

Volkswagen stalls

Auto titan Volkswagen announced earlier this month it could take the unprecedented step of closing factories in Germany for the first time in its 87-year history.

Europe’s biggest carmaker is struggling with high costs, problems in the transition to electric vehicles, and fierce competition from local rivals in key market China.

Employees of German car maker Volkswagen (VW) protest at the start of a company’s general meeting in Wolfsburg, northern Germany, on September 4, 2024. Photo by Moritz Frankenberg / POOL / AFP

A week after VW’s shock announcement, BMW announced it was recalling 1.5 million vehicles due to problems with their brakes and downgraded its outlook for the year, also citing problems in China.

Steel storm

Efforts by Thyssenkrupp to spin off its loss-making steel division and get its business back on track ran into trouble last month when a host of senior executives quit in protest at the what they said was the unacceptable behaviour of the group’s CEO.

The row centres around plans to restructure the division, which operates Europe’s largest steelworks in Duisburg, western Germany.

The conglomerate wants to separate the steelmaking unit from its other activities, which include building submarines, as it faces higher manufacturing costs and competition from cheaper Asian steel.

It already announced that it plans to cut jobs in Duisburg and reduce production.

Firms face being gobbled up

Deutsche Bahn announced last week that logistics unit Schenker, traditionally one of its most profitable arms, is to be sold to Danish group DSV, with unions fearful it could lead to thousands of job losses in Germany.

Meanwhile Italian bank UniCredit is targeting a takeover of Commerzbank after building up a nine-percent stake in Germany’s second-biggest lender, a development that reportedly blindsided Berlin and has angered German unions.

Still some say such takeovers also highlight that German firms remain attractive, despite the woes of the broader economy.

Poor indicators

After starting the year on a positive note, recent surveys – from business morale to consumer confidence – have been on a downward trend, denting hopes of a strong rebound.

Some economic institutes have cut their forecasts, and now expect either stagnation or a slight recession for the whole year.

In its last official forecast in April, the economy ministry still expected growth of 0.3 percent this year, but it may downgrade that forecast when it updates the figure soon.

Commenting after a recent batch of negative data, ING economist Carsten Brzeski summed up Germany’s problems: “Years of stagnation, and underestimating technological trends and international competition do not come without consequences.”

By Sophie MAKRIS