Germany’s economy is “stuck in stagnation”, says ING

ING’s head of global macro research painted a bleak picture of Germany’s struggling economy after a major indicator of activity posted its fifth consecutive monthly decline.

The Ifo business climate index, which measures economic activity in manufacturing, services, trade and construction, fell to 85.4 in September from 86.6 in August, indicating a slowdown in activity.

ING’s Carsten Brzeski said: “The German economy is back to where it was a year ago: the eurozone’s growing laggard, with little sign of improvement imminent.

“After the economy contracted in the second quarter, all available sentiment indicators for the first two months of the third quarter offer very little cause for optimism.”

A slowdown in broad-based business activity follows a prolonged cycle of negative manufacturing PMI that has been in contractionary territory for more than two years.

Germany is still reeling from the shutdown of cheap Russian oil and gas following the country’s invasion of Ukraine, raising input costs for businesses.

Falling demand from China, one of its main trading partners, has exacerbated a prolonged recession in the manufacturing sector.

The most publicized issue in recent months, however, has been a crisis engulfing Germany’s auto sector. A slower-than-expected consumer transition to electric vehicles has left Volkswagen and BMW licking their wounds after an ambitious early bet on the technology. Both, meanwhile, also fell victim to the broader slowdown in Chinese demand.

Volkswagen, Germany’s biggest employer, has scrapped a 30-year deal to protect jobs and suggested it may be forced to close a German plant for the first time in its history. The company is in negotiations with unions on pay deals amid a €10bn cost-cutting plan.

The plight of German automakers, says Brzeski, is “just another illustration of ongoing structural and cyclical problems, but unfortunately likely to fuel the negative sentiment even more; a perfect vicious circle.”

Meanwhile, other international firms are abandoning their expansion plans in Germany. Intel has announced it is delaying plans for a €30 billion factory in the country by up to two years, sparking a government rift over Germany’s nearly €10 billion commitment to its development.

There is not much to be optimistic about on the horizon, with German consumers and businesses concerned about a potential US economic slowdown, in addition to rising geopolitical tensions and an unstable political environment in their own country.

Brzeski says the Ifo indicator is likely to improve towards the end of the year.

“Of course, this would be a cyclical improvement from very low levels that hardly changes the narrative of a country stuck in stagnation.”