Germany's business confidence took an unexpected hit to its lowest point since summer 2020, when a fall in business morale was spurred by a combination of factors including a train strike and supply chain complications stemming from a Red Sea re-routing incident.
The ifo Institute, based in Munich, revealed that the business confidence index dropped to 85.2 in January, a decrease from December's revised reading of 86.3. Contrary to predictions, which projected the index to rise to 86.7, January's reading fell to a low unseen since May 2020.
Companies' assessment of their current situation declined, on top of more bleak expectations for the forthcoming months. The index reflecting the current situation dropped to 87.0 from the previous month's 88.5 and fell short of the expected reading of 88.6.
In line with this, the expectations indicator also declined, falling to 83.5 in January from 84.2 in December, a score slightly below the predicted 84.8.
According to Clemens Fuest, the president of the ifo Institute, the German economy is facing a recession. Andrew Kenningham, an economist with Capital Economics, adds to this by forecasting that the largest economy of the Euro area may experience another contraction in the first quarter and an overall zero growth for the year.
Carsten Brzeski, an economist from ING, warns that the state of stagnation and mild recession is likely to persist, with a high risk of 2024 being another year of recession.
With last year's economic contraction of 0.3 percent, the ifo Institute has lessened Germany's growth projection for 2024 to 0.7 percent, down from the previous estimate of 0.9 percent.
Furthermore, the German government's decision regarding the allocation of unused funds initially intended for the coronavirus pandemic towards its Climate and Transformation Fund was declared unconstitutional by the Federal Constitutional Court in November. The economic impact of this decision, whether reduced expenditure or increased taxes, was unclear at the time of the ifo's economic forecast in December. The baseline forecast assumed the implementation of all fiscal policy measures planned at that point, disregarding the budget gap.
