German economy stuck in a vicious cycle of stagnation

After a key activity measure fell for the fifth month in a row in September, economists warned that Germany’s economy was stuck in a vicious cycle of stagnation. This month, the Ifo monthly business climate index fell from 86.6 down to 85.4. The forecast was for 86.1. This is the fifth consecutive drop in the index, which puts the economy at the brink of recession this year.

The Ifo Institute reported that “companies assessed their current situations as significantly worse and expectations were also significantly more pessimistic.” The lack of orders is getting worse. “The core sectors of German Industry are struggling.” Germany’s quarterly economic growth declined by 0.1 percent between April and Juni, marking the beginning of a technical contraction.

Carsten Brzeski is the head of macroeconomics for ING. Two years of high interest rates and inflation have dampened consumer confidence in Germany

“The economy has returned to where it was one year ago, the growth laggard in the Eurozone with little sign of an impending improvement.” All available sentiment indicators in the first two month of the third-quarter provide very little reason for optimism.

The German economy has been affected by the rising cost of energy and a lower demand for German exports from large economies such as China and US. High inflation and rising interest rate have affected business and consumer confidence for the past two years. The growing unpopularity of Germany’s ruling coalition and its underinvestment in public services and infrastructure has also contributed to the decline.

Separately another survey of German private sector reported that output fell for the third consecutive month in September. This was led by the weak manufacturing sector and a decline in hiring throughout the economy. Capital Economics says that the decline in Capital Economics’ purchasing managers index indicates a contraction of 0.4 percent in the third quarter.

Ifo’s survey of 9,000 companies in manufacturing, retail and services showed a general decline, with a drop of two points on the business expectation for growth. The manufacturing index fell to its lowest level since July 2020. Construction was the lone exception with a modest 0.4-point increase in sentiment this month.

Claus Vistesen is the chief eurozone economist of Pantheon Macroeconomics. He said that the investment has been weakened in the first half year, and that the expected rebound in consumer spending due to increasing real incomes is not yet happening. Other surveys indicate that the pessimism in Germany’s economic climate is spreading.

Volkswagen, a German auto group, announced last month that it would be considering closing two factories. This will mark the first time has closed factories in Germany. The move was opposed by the Social Democrat led federal government. Last month, new car registrations dropped by 28 percent. This was the biggest drop in the Eurozone.

The coalition government in Berlin has also attacked the Italian bank UniCredit for increasing its stakes in Commerzbank – one of Germany’s biggest lenders, where the state holds a 12.5% stake. Olaf Scholz said that UniCredit was launching an “unfriendly” attack on the German government.

Scholz, speaking in New York, said that hostile takeovers were not good for banks. The German government had therefore clearly taken a position in this direction.