Business sentiment in Germany continues to decline, according to the latest edition of the ifo Business Climate Index, with the ifo Institute noting that the ‘German economy is increasingly falling into crisis’.
According to the index, the business climate fell from 87.0 points in July to 86.6 points in August, with businesses believing their current situation to be ‘worse’, and expectations across the sector more pessimistic.
Sector by sector
In Germany‘s manufacturing sector, the index saw a significant decline, with companies expressing much lower satisfaction with their current business situation. Expectations have dropped to their lowest level since February 2024, while there are also ongoing reports of decreasing order backlogs, particularly affecting investment goods manufacturers.
The service sector also experienced a deterioration in business climate, mainly driven by more sceptical expectations among firms. The current business situation worsened slightly as well.
When it comes to trade, meanwhile, the business climate index rose marginally after two consecutive declines, attributed to slightly less pessimistic expectations. However, traders remain less satisfied with their current situation.
In construction, the index remained unchanged. While companies were slightly more satisfied with their current business situation, their expectations declined slightly.
‘Potential surprises’
Commenting on the findings, Carsten Brzeski, an analyst with ING, noted, “As depressing as this new wave of falling sentiment indicators is, don’t rule out potential positive surprises in the second half of the year. While the highest increase in real wages in more than a decade could still open German consumers’ wallets, despite increasing job loss fears, it is industrial production that could still come to the rescue.
“Inventories have been at high levels for an unprecedented long time. It only needs a small improvement in industrial order books to turn the inventory cycle and get industrial production growing again.”
About the ifo Business Climate Index
The ifo Business Climate Index is based on around 9,000 monthly responses from businesses in sectors such as manufacturing, services, trade, and construction. Companies are asked to evaluate their current business situation and their expectations for the next six months.
For the current business situation, companies describe it as either “good,” “satisfactory,” or “poor.” For their expectations over the next six months, they assess whether conditions will be “more favourable,” “unchanged,” or “less favourable.” The index is calculated using balance values, which represent the difference between the percentage of positive and negative responses.
The balance value for the current business situation reflects the difference between the shares of “good” and “poor” responses. Similarly, the balance value of expectations is determined by the difference between the shares of “more favourable” and “less favourable” responses. The overall business climate is a transformed mean of these balance values, normalised to the average of the year 2015, providing an overall measure of business sentiment in Germany.
