Business Climate in Germany Again Below Expectations

The business indices of purchasing managers for Germany (PMI indices) and the IFO business climate index in June again show a more negative picture compared to expectations. The PMI index for the services sector, as the most reliable business barometer for the euro area, unexpectedly fell to 53.5 points, marking the first decline after four consecutive months of growth. However, the index remains above 50 points, above which (historically speaking) a decline in economic activity is not expected, writes the chief economist of the Croatian Employers’ Association Hrvoje Stojić in the Weekly Focus.

At the same time, the decline in the PMI index for the manufacturing sector deeper into ‘recession’ reflects a clear deterioration in competitiveness (in terms of investment destination attractiveness, energy prices), and the turnaround in the inventory cycle that many hoped for since the beginning of the year is still not happening. In fact, inventory levels have been stable at elevated levels for months, and orders have been on a downward trend since December last year.

Moreover, the IFO business climate index brings negative signals, solely due to the decline in the component of economic expectations over a six-month horizon after a previous four-month growth, indicating that the German economy is still struggling to gain greater momentum.

Export expectations in the IFO index continue to decline to one point, confirming the thesis of significant uncertainty regarding the economic recovery. Even more concerning is that the weakness transcends the industry. Despite strong nominal wage growth and somewhat improved consumer confidence, Stojić notes, personal consumption is still not emerging as a growth driver. Currently, it seems unlikely that the German economy gained momentum in the second quarter, if it even did at all. Despite a sort of cold shower, the German economy should still gain momentum during the summer months.

– It will take a little longer than we thought, but strong wage growth should still stimulate a cautious recovery in personal consumption, and even the inventory cycle should gradually become positive. On the other hand, the increasing number of bankruptcies and announcements from certain companies about imminent job restructuring this year hang like a sword of Damocles over the labor market. Additionally, the political uncertainty arising from government budget negotiations, as well as the well-known structural weaknesses of the economy, will limit the pace of any recovery. All of the above supports a scenario of de facto further stagnation of the German economy, without a significant deterioration in economic conditions, while certain positive movements in the first part of the year give hope for a ‘tiny’ real growth rate this year. Overall, in 2024, we expect the German economy to grow by about 0.3 percent, while in 2025, we expect growth of 0.5 percent, concludes Stojić.