German business sentiment worsens in May

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BERLIN, May 24 (Reuters) – German business morale fell further than expected in May due mainly to a sharp decline in future expectations, another sign that Europe’s largest economy is facing stubborn economic headwinds, a survey showed on Wednesday.

The Ifo institute said its business climate index stood at 91.7 following a reading of 93.4 in April. A Reuters poll of analysts had pointed to a May reading of 93.0.

This is the first decline after six consecutive increases.

The German economy is treading water and could stagnate in the second quarter of the year, Ifo economist Klaus Wohlrabe said on Wednesday after the institute released its latest numbers.

In May, both components of the indicator fell: managers were significantly more pessimistic in their expectations and were somewhat less satisfied with their current situation.

“German companies are sceptical about the upcoming summer,” said Clemens Fuest, president of the Ifo Institute. The expectations indicator fell to 88.6 in May from 91.7 in April.

“The strong collapse in expectations in industry is striking,” said Wohlrabe, as expectations in manufacturing posted the largest decrease since March 2022, after the start of the war in Ukraine.

Export expectations have also fallen markedly as interest rates appear to dampen demand, he added.

On the supply side, the situation is improving, as supply bottlenecks have eased further, said Wohlrabe. There are also positive signs on inflation, with fewer companies aiming to increase prices, he added.

The significant decline in the Ifo business climate is not an outlier, as other leading indicators such as the Purchasing Managers’ Index for industry and incoming orders have been pointing downwards for some time, said Joerg Kraemer, Commerzbank chief economist.

“A technical recession in the second half of the year is more likely than an economic recovery, which most economists still expect,” Kraemer said.

The performance of the German economy in the second quarter is very uncertain, said Franziska Palmas, senior Europe economist at Capital Economics.

“But regardless of how well the economy held up this quarter, we still expect it to be very weak further ahead in 2023.”

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