PoundSterlingLIVE – Chancellor Olaf Scholz lost a confidence motion on Dec. 16. which paves the way for new elections in early 2025. File image of Olaf Scholz. Image: Deutsche Bundesbank.
Another dire economic reading from Germany hardly surprises, but better days lie ahead, says one economist.
The leading sentiment survey of Germany shows the Eurozone’s biggest economy is no closer to exiting stagnation, although 2025 brings hope as the new government has little choice but to invest.
The ifo Business Climate Index for Germany fell to 84.7 points in December, down from 85.6 points in November.
This is the lowest level since May 2020 and the decline was due to more pessimistic expectations, although companies assessed the current situation as better.
“The only good thing about Germany’s just-released Ifo index is that it is the final major macro indicator released this year. Time to take a breather and to end a year that will go down as the second consecutive year of economic stagnation,” says Carsten Brzeski, Global Head of Macro (BCBA:) at ING.
The report confirms chronic weakness in the German economy:
Manufacturing: The index fell markedly, with companies less satisfied with their current business and significantly gloomier expectations. The order situation also deteriorated, and production cutbacks have been announced.
Service Sector: The Business Climate Index worsened due to more sceptical expectations, but the current situation was assessed as somewhat better. The catering sector reported positive Christmas business, while the transport and logistics sector is concerned about the coming months.
Trade: The index failed to continue its upward trend, with companies less satisfied with current business and growing pessimism regarding expectations. This was driven primarily by wholesale, although retail also tended to be unsatisfied.
Construction: The business climate improved, although expectations worsened. Companies were slightly more positive about their current situation, but their expectations for the future declined.
The ifo Business Climate Index is based on approximately 9,000 monthly responses from businesses in manufacturing, the service sector, trade, and construction.
Companies provide assessments of their current business situation and expectations for the next six months. The index is calculated using the balance of responses and normalised to the average for the year 2015.
A Turning Point
Negative sentiment towards Germany has been a consensus theme for two years now, but this could change in 2025 as a new government has the potential to inject fresh impetus into the economy.
ING says the election could bring with it a surge in confidence and growth in Germany.
“The more optimistic scenario includes a new government that agrees on structural reforms, investments and looser fiscal policy. Whether looser fiscal policy also means a reform of the constitutional debt brake or just some workarounds via exemptions or special purpose vehicles depends on the outcome of the elections,” says Brzeski.
He says there is a growing consensus across most parties on the need for more investments, and ING sees looser fiscal policies in Germany materialising, at the latest in 2026.
“Just to make up for the investment gap accumulated over the last decade, Germany would need additional investments of 1.5% GDP per year over the next 10 years. This is not all public investments, but the government will have to play an important role in providing public goods like infrastructure and education and creating incentives for private investments. Currently, the most likely outcome after the elections is at least an infrastructure investment fund,” says Brzeski.
Peak pessimism towards Germany suggests the only way is up. If this is to be a theme in 2025, the Euro could potentially hitch a ride higher.
An original version of this article can be viewed at Pound Sterling Live
