German business morale dips as winter slump looms

German business morale dips as winter slump looms

BERLIN (Reuters) – The German economy is heading for recession, the Ifo institute said on Monday, citing a stronger-than-expected decline in business sentiment across all sectors as Germany seeks to avoid gas shortages this winter.

The Ifo Institute said its business climate index fell to 84.3 from 88.6 in August, marking a sharper decline from the 87.0 that economists had expected according to a Reuters poll.

This was the lowest level seen since the early stages of the COVID-19 pandemic in May 2020.

Chart: German trading sentiment

Ifo said the slowdown was evident in all four sectors of the German economy, adding that pessimism had increased significantly looking into the coming months.

“We’re seeing significant shortfalls on all fronts,” said Klaus Wallrabe, economist at Ifo. “Price expectations are up again, with more than every two companies announcing price increases.”

In August, German producer prices rose 7.9% from the previous month, with higher energy prices leading the trend.

The IFO poll for September “points more than ever to a recession in the winter half of the year” as the extremely high cost of energy imports makes Europe’s largest economy poorer, said economist Joerg Kramer Commerzbank (ETR :).

“The energy price shock has caused a collapse in consumers’ purchasing power and made production unprofitable for many companies,” Kraemer said.

Russia has drastically reduced gas flows to Germany as part of an economic standoff over the Ukraine war, driving up energy bills for German homes and businesses and forcing the German government to consider rationing this winter.

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On Monday, the Organization for Economic Co-operation and Development forecast that the German economy will contract 0.7% next year, down from June’s estimate of 1.7% growth.

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