The latest edition of the S&P Global Germany Business Outlook has found that German firms are becoming significantly more cautious about the year ahead, with businesses planning workforce reductions amid low growth and high inflation.
Business expectations for the next 12 months fell sharply, the June outlook showed, with the net balance of firms expecting higher activity dropping to +10%, down from +24% in February, and standing at the lowest level since October 2024.
Among the 12 countries covered by the survey, only France recorded weaker business confidence.
‘Taken a toll’
“The war in the Middle East has taken a toll on Germany‘s near-term growth prospects and put paid to some of the burgeoning optimism seen at the turn of the year,” commented Phil Smith, economics associate director at S&P Global Market Intelligence. “But perhaps the most eye-catching insight from the latest business outlook data is that firms are planning sizeable job cuts in the coming 12 months.”
Just over a quarter (26%) of German manufacturers said that they expected business activity to increase over the coming year, while 23% anticipated a decline. Confidence also weakened across the services sector, falling below its long-run average.
Businesses cited subdued demand, difficult economic conditions, persistent cost pressures, inflation, geopolitical uncertainty and weak private-sector investment as the main factors weighing on growth, S&P Global noted.
Bureaucracy, regulation and increasing international competition were also identified as significant obstacles.
Despite the weaker outlook, firms highlighted digitalisation, artificial intelligence, new product development and expansion into new markets as potential growth opportunities, while greater geopolitical stability and domestic policy reforms were also seen as positive factors.
The deterioration in sentiment was accompanied by increasingly negative employment plans, while businesses also expect to reduce capital expenditure over the coming year. Investment intentions remained negative at -8%, while research and development spending was broadly stable, posting a slightly negative balance of -2%.
Bearish outlook
“Excluding the pandemic, German firms are their most bearish about employment since the global financial crisis,” Smith added. “In the manufacturing sector in particular, the data points to widespread efforts to improve productivity as a means to counteract high costs and growing competition from abroad.
“Most data was collected in roughly the middle two weeks of June and thereby don’t reflect the further correction in oil prices we’ve seen since then. But interestingly, despite firms revising up their forecasts for non-staff cost inflation quite substantially since the last survey in February, wage expectations actually dropped slightly in line with forecasts of looser labour market conditions, which encouragingly for policymakers at the ECB points to second-round inflationary pressures being somewhat contained.” Read more here.
