Germany on cusp of recession as business sentiment totters
German business morale fell more than expected in July, the Ifo business sentiment survey showed on Monday, as the institute that compiles it said high energy prices and looming gas shortages had let Europe’s largest economy on the cusp of recession.
The Ifo institute’s closely watched business climate index dropped to 88.6, its lowest in more than two years and below the 90.2 forecast in a Reuters poll of analysts. June’s reading was marginally revised down to 92.2.
“Recession is knocking on the door. That can no longer be ruled out,” said Ifo surveys head Klaus Wohlrabe.
Germany faces the threat of gas rationing unprecedented in generations this winter following a significant drop in supplies from Russia, whose president, Vladimir Putin, the West accuses of weaponising energy in response to sanctions levied against him over the war in Ukraine.
Russia says it is conducting a “special military operation” there to fight nationalists.
Russia this month shut down the Nord Stream 1 pipeline that supplies Germany with gas via the bed of the Baltic Sea for 10 days of maintenance that some feared would be extended.
Pumping resumed on Thursday, but at only 40 per cent of capacity.
Wohlrabe told Reuters in an interview that if
German gas deliveries continued at that level “there will be no recession.”
However, Germany’s gas network regulator said on Friday that, if gas through the pipeline continued to be pumped at only 40%, the country would need to take “additional measures” to reach the 90 per cent of storage capacity set as a target to avert winter rationing.
The government has said it would prioritise residents over the corporate sector in the event of rationing, and Monday’s Ifo index, which surveys about 9,000 firms, showed expectations for business to significantly worsen in the coming months.
“The Ifo business climate index, like the purchasing managers’ index, now clearly points to a downturn in the German economy,” said Commerzbank economic analyst Jorge Kraemer.
“How bad it ends up unfortunately lies mainly in Putin hands.”
S&P Global’s flash Purchasing Managers’ Index (PM) for German services and its index for manufacturing both fell to 49.2 in July, data showed on Friday, below analyst forecasts for them to hold above the 50 mark that separates growth from contraction.
Meanwhile German government bond yields edged higher from their lowest level since May ater European Central Bank officials affirmed their commitment to bring inflation back down towards their 2.0 per cent target.
ECB President Christine Lagarde said over the weekend the central bank would raise interest rates for as long as necessary to bring inflation down, adding that the ECB’S decision at the September meeting would depend on data in the interim.
ECB governing council member Martins Kazaks said the central bank might not be done with big interest rate rises, adding that the rate increase in September needed to be “quite significant”.
The ECB raised its benchmark deposit rate by 50 basis points to zero per cent on Thursday, its first hike in 11 years as it joined global peers in jacking up borrowing costs.
Money markets currently price in around a 65 per cent chance of another 50 basis point hike at the September gathering and a further 107 basis points of tightening by year end.
Yields on benchmark 10-year German government debt rose 3 basis points to 1.042 per cent, ater Friday saw the biggest one-day fall since March.
German two-year yields rose almost 5.5 bps to 0.439 per cent, following Friday’s 26 basis point drop, the biggest one-day fall in two-year yields since 2005.
“You expect some consolidation ater a move that large,” said Peter Mccallum, rates strategist at Mizuho, who highlighted today’s German Ifo survey and US manufacturing gauges as data points to watch on Monday.
The latest Ifo survey showed German business morale had fallen more than expected in July as high energy prices and the threat of gas shortages weighed. Ifo economist Klaus Wohlrabe said a recession is knocking at Germany’s door.
The data adds to recession fears ater a preliminary reading of a purchasing managers survey on Friday showed a contraction in business activity in both manufacturing and services in Germany.
“With central bank rhetoric tilted towards the inflation-fighting mantra but business and consumer sentiment deteriorating by the day, high volatility is likely to stay,” Unicredit analysts said in a note.
They added that the macro environment pointed towards a further flatening of the euro-area curve.
Count r y’s business climate index dr opped t o 88.6, it s lowest in mor e t han t wo year s and below t he 90.2 forecast in a poll of analyst s