German business confidence falls as concerns mount

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German economy updates

German business expectations fell sharply in August as supply chain disruptions and concerns about a resurgence in Covid-19 infections weighed on the recovery from the pandemic in the eurozone’s largest economy, according to data published on Wednesday.

A widely-watched business climate index produced by the Ifo Institute in Munich fell to 99.4 in August, from 100.8 in the previous month. It was the second consecutive monthly decline after steady improvement since the start of this year.

It was dragged down in particular by businesses’ expectations for the next six months; that index dropped to a six-month low of 97.5, from 101.2 in July. Economists polled by Reuters had expected only a marginal dip to 100.

“Supply bottlenecks for intermediate products in manufacturing and worries about rising infection numbers are putting a strain on the economy,” said Clemens Fuest, president of the ifo Institute.

Due to the fears about the possibility of new lockdowns, “concerns are growing in the hospitality and tourism sectors”, he added.

Line chart of Ifo index showing German business expectations for the coming months fall sharply

Taken in conjunction with a recent softening in Germany’s Zew sentiment index and surveys of purchasing managers, the data suggests “a loss of momentum for Germany in the second half of the year”, said Carsten Brzeski, global head of macro at the bank ING.

“If hard data follows the levelling-off of soft indicators, the economy’s return to pre-crisis levels will be delayed,” he warned.

In contrast, companies reported a strong improvement in current conditions, with the corresponding index rising to its highest level since May 2019.

Andrew Kenningham, chief Europe economist at Capital Economics, said this suggested that the German economy “is still buoyant” and forecast “very strong” growth in gross domestic product in the third quarter of about 3 per cent from the previous three months. The German economy grew by 1.6 per cent in the second quarter.

However “supply chain difficulties will continue to hamper the manufacturing sector and the Delta variant will dampen prospects for the hospitality sector”, he said. Although he previously forecast 4 per cent GDP growth over the course of 2021, he has revised that down to 3 per cent in light of the deterioration in recent sentiment data.

Sentiment declined particularly sharply in the manufacturing sector. Although companies reported somewhat weaker demand, they were largely positive about current circumstances. But their outlook for the coming months fell sharply; the corresponding index hit its lowest level since last November.

Businesses in the services sector reported better conditions than in previous months, but their optimism about the future “has faded”, Fuest said.

Construction bucked the trend; companies reported both better current business and improved expectations. Like many other advanced economies, Germany is experiencing strong housing demand and fast house price growth.

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