Fall in German business sentiment points to a contracting economy

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German business morale fell more than expected in December, adding to recent evidence that the eurozone’s largest economy could contract for the second consecutive quarter at the end of 2023.

A widely-watched business climate index produced by the Ifo Institute in Munich fell to 86.4 in December, figures published on Monday showed, down from 87.2 in the previous month and well below the 87.8 figure forecasted by analysts in a Reuters poll.

The Ifo survey measures of the health of German industry several months before official statistics. Together with a decline in the December PMI index published last week, the findings suggest that Germany closed the year with declining activity.

Morale was particularly low in construction, with the sector’s current and future sentiment at its lowest level since September 2005 and with about half of builders expecting business to deteriorate further.

Separate data published by Destatis, the federal statistics office, showed the increasing pressure on Germany’s construction sector. The number of permits for residential buildings from January to October fell 26.7 per cent from the same period a year earlier to 218,100, Destatis said on Monday.

The Ifo and PMI indices point “unequivocally to a continued downturn”, said Andrew Kenningham, chief Europe economist at Capital Economics. “It looks very likely that GDP will contract for a second successive quarter in Q4 and the outlook for 2024 does not look much better,” he added.

German economic output fell 0.1 per cent in the three months to September compared with the previous three months, according to official statistics.

The Ifo index had risen from September to November, but the latest result wiped out most of those gains. Melanie Debono, an economist at Pantheon Macroeconomics, said the drop “confirms that the eurozone’s largest economy entered a technical recession at the end of the year”.

The results were affected by a government impasse this month over its public finances, after a November court ruling left a €60bn hole in the budget, she added.

The Ifo Institute said “companies were less satisfied with their current business [and were] more sceptical about the first half of 2024”.

The assessment on the current business situation fell noticeably in energy-intensive industries, according to Ifo, but improved slightly in the services sector. In restaurants and catering, expectations for the next six months took a nosedive.

The property sector, a key driver of recent growth in the German economy, has been hit by rising interest rates. Monday’s Destatis data showed that building permits for the construction of single-family homes were down by an annual rate of 38.2 per cent, those for two-family homes were down 50.5 per cent and multi-family homes were down 25.2 per cent.

House prices fell by an annual rate of almost 10 per cent in the second quarter, the largest drop of any other member state.

Carsten Brzeski, global head of macro at the bank ING, said it has been “another turbulent year in which the economy seems to have been in permanent crisis mode”.

“Supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy and several structural shortcomings — the list of crises and challenges facing the German economy is long,” he said.