Sentiment in the German economy is deteriorating

The supply bottlenecks are causing problems for companies: the Ifo Institute’s business climate index has continued to fall. Economist Clemens Fuest speaks of a “bottleneck recession” in this context. by Dirk Mewis

In September, the mood in the German economy deteriorated again. The Ifo Business Climate, Germany’s most important economic barometer, fell by 0.8 points to 98.8 points compared to the previous month. This is the third decline in a row, which experts usually interpret as an economic turning point. Analysts had expected a slightly smaller decline to 99.0 points.

Problems in the procurement of raw materials and intermediate products are slowing down the German economy, explains Ifo President Clemens Fuest. “Industry is experiencing a bottleneck recession,” the economist explains, referring to the supply bottlenecks, which are largely a consequence of the Corona pandemic. The companies surveyed assessed both their current business situation and future prospects more unfavourably.

In September, the mood was weighed down above all by industry. There, the business climate clouded over considerably. Although the order books are still well filled, new orders flattened out, the Ifo Institute sums up. Among service providers, on the other hand, the business climate brightened. In the hotel and restaurant industry and tourism, a certain confidence had returned. In construction, the mood also improved, in trade it remained almost unchanged.

Bank economists were not very optimistic about the figures. Economist Jens-Oliver Niklasch of the Landesbank Baden-Württemberg predicted a difficult fourth quarter. In his view, supply bottlenecks could even replace Corona as the main risk, although the Corona pandemic is by no means over.

The Ifo Institute expects only 2.5 per cent economic growth – mainly because industry is missing important parts. “The strong recovery after Corona originally expected for the summer continues to be postponed,” notes Ifo’s head of economic research Timo Wollmershäuser. Last year, Germany’s economic output had slumped by 4.9 per cent compared to the previous year. The coming German government can then expect a strong upswing. Thus, the Ifo researchers raised their growth forecast for 2022 by 0.8 points to 5.1 per cent.

Supply problems put the brakes on

“Currently, industrial production is shrinking as a result of supply bottlenecks for important intermediate products,” Wollmershäuser adds. Global demand for consumer durables and electronic goods has pushed many manufacturers to their capacity limits. In addition, changing commodity flows have posed enormous challenges to global supply chains.

Other research institutes had also recently lowered their forecasts. The RWI in Essen expects 3.5 per cent economic growth this year, the IWH in Halle 2.2 per cent and the DIW in Berlin 2.1 per cent. The leading research institutes plan to present a joint autumn forecast in mid-October.

The Association of German Banks (BdB) also expects somewhat less growth for the current year than originally hoped for. The chief economists of the German private banks calculate an economic plus of 3.3 percent – which corresponds to the level before the Corona crisis. “However, the truth is also that the risks for economic development have increased recently,” said the chief economist for Germany at Deutsche Bank, Stefan Schneider, to the Redaktionsnetzwerk Deutschland.

According to the bank economists, the greatest factors of uncertainty are the increased Corona infection figures as well as supply and production bottlenecks, which are affecting industry in particular. Accordingly, the strongest pillars of growth remain world trade and above all private consumption.

“We expect private consumption to increase by seven per cent in 2022. That would be by far the strongest increase since reunification,” explained BdB Managing Director Christian Ossig. “The forced saving by Corona seems to be over, the catch-up effects will carry into next year.”

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