Germany's business outlook has taken a hit as a new report by the Munich-based Ifo Institute reveals that the country's economy is struggling to recover from its recent recession. The report states that the expectations gauge fell to 83.6 in June, much lower than the anticipated levels by Bloomberg's survey. In addition, a measure of current conditions also fell. According to Clemens Fuest, the President of Ifo, "Above all, the weakness in the manufacturing sector is steering the German economy into turbulent waters."
The report emphasizes how the declining industrial activity in other countries around the world and weakening demand from China, are causing Germany's factory base, which has been the motor of growth for Europe, to slow down. A separate assessment in Italy also showed waning economic momentum.
Although Germany's Economy Ministry reported this month that output had yet to see any noticeable pickup, a survey by banks of 1,000 small and medium-sized businesses published over the weekend showed that business confidence is returning to Germany despite the economic downturn, as energy costs decline. A separate report by the Bundesbank also offered glimmers of hope, stating that the economy likely returned to growth and expanded 'slightly' in the three months through June.
However, the tightening of 400 basis points by the European Central Bank is likely to impose an increasing brake on expansion over the months to come. The Bundesbank Chief, Joachim Nagel has indicated that he would be in favor of a further quarter-point move beyond one already slated for July, given that inflation remains undefeated. While the central bank claims that underlying price pressures are likely to remain very high, and the decline in inflation may therefore be more sluggish than previously expected, an independent commission published its recommendation on Monday that Germany's minimum wage should rise significantly.
In conclusion, the German economy is experiencing some turbulence, which has led to a fall in its expectations gauge and affected the manufacturing sector. However, there are serious doubts that the economy will see growth in the short-term, with the European Central Bank’s 400 basis points tightening causing a brake on expansion, and inflation rates remaining high.