German business confidence slumps

25/8/2016

By Claire Jones

German businesses’ confidence has slumped, according to a closely watched index, raising concerns that the UK’s Brexit vote has clouded prospects for the eurozone’s largest economy.

The Ifo business climate index, compiled by the Munich-based think-tank, fell to 106.2 points in August, from 108.3 in July. While a lower reading was recorded earlier this year, the scale of the fall since last month has unnerved economists.

“Today’s Ifo reading is a good reminder that the relatively benign reaction of eurozone data to the Brexit vote should not be taken as given,” said Carsten Brzeski, an economist at ING bank. “The negative confidence impact is for real.”

The poll surveys about 7,000 German businesses from a range of sectors by asking them to give their assessment of the current business climate and expectations for the next six months.

“The German economy has fallen into a summer slump,” said Clemens Fuest, Ifo president, pointing to weaknesses in several sectors — especially the chemicals and electrical industries. “Expectations also clouded over markedly, falling below their long-term average . . . The volume of new orders declined.”

Strong Ifo figures for July had buoyed hopes that Germany could shake off the impact of Britain’s decision to break off from the EU.

While data for the UK economy have been mixed, business surveys and confidence indicators for the eurozone have suggested the single currency area’s slow but steady recovery remains on track. The August purchasing managers’ index, which measures business activity, signalled this week that growth in the third quarter was likely to be around the 0.3 per cent level recorded for the second quarter.

The poor Ifo figure could revive fears that the Brexit vote, along with other geopolitical developments, such as the US presidential election, could trigger a broader wave of uncertainty in the EU. Such a loss of confidence could reduce spending by households and businesses in the single currency area.

Some economists cautioned against reading too much into the August Ifo figure.

“Now everybody is thinking of the Brexit, of course. But we should not dramatise the consequences for the German economy,” said Jörg Krämer, an economist at Commerzbank. “Firstly, the markets quickly calmed down soon after the vote in the UK. Secondly, the other sentiment indicators have barely fallen. German GDP should grow by a strong 1.8 per cent this year.”

Mr Krämer said the reversal in the index was not down to Brexit but rapid growth in the first half of the year that was not possible to maintain.

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