Business Morale Declines in Germany Amid Economic Uncertainty

By Rachel More

BERLIN (Reuters) – German business morale worsened more than expected in December, a survey showed on Tuesday, weighed down by companies' pessimistic assessment of the coming months amid geopolitical uncertainty and an industrial slump in Europe's largest economy.

The Ifo institute reported that its business climate index fell to 84.7 in December from a slightly downwardly revised 85.6 the previous month.

> "The weakness in the German economy has become chronic," said Ifo president Clemens Fuest.

While Ifo's survey reflected deep concerns among companies, a separate survey by the ZEW institute showed investors were more optimistic, largely pinning their hopes on a change in government following the upcoming February 23 election.

Ifo's poll, covering around 9,000 managers, indicated some improvement in current conditions; however, the expectations index dropped to 84.4 in December from 87.0 in November. Economists surveyed by Reuters had expected a reading of 87.5.

The re-election of Donald Trump in the U.S. and the ongoing war in Ukraine, combined with a wait-and-see approach to investments ahead of the snap elections, have heightened uncertainty as Germany's economy struggles.

The country is on track for a second consecutive year of economic contraction in 2024, with further challenges expected as the industrial sector remains stagnant. Major companies like Volkswagen are looking to cut production, while consumer sentiment is decreasing due to fears of job cuts.

Investors More Optimistic

Joerg Kraemer, chief economist at Commerzbank, attributed the pessimism to long-standing issues in German industry. He predicted that the decline in ECB interest rates is unlikely to positively impact gross domestic product (GDP), forecasting only minor growth of 0.2% in 2025.

Cyrus de la Rubia from Hamburg Commercial Bank indicated that the bleak outlook may lead to hesitance in investments, especially as companies await political parties to unveil their election campaigns.

> "No fundamental improvement in the economic situation is expected in the first half of the year," de la Rubia noted.

Despite this, the ZEW institute's December survey showed a significant boost in investor sentiment, with its economic sentiment index rising to 15.7 points in December from 7.4 points, exceeding expectations for a decline.

While the upcoming elections may introduce short-term uncertainty, the ZEW views them as a positive development in the long run, anticipating that a new government will implement measures to revitalize the economy.

> "With snap elections ahead in Germany and the resulting expectations of an economic policy encouraging private investment as well as the prospect of further interest rate cuts, the economic outlook is improving," stated ZEW President Achim Wambach.