Germany economy in vicious cycle of stagnation, economists warn

The German economy is stuck in a “vicious cycle of stagnation”, economists have warned, after a key measure of activity fell for the fifth consecutive month in September.
The monthly Ifo business climate index, a leading indicator for growth in the engine of Europe, dropped this month from 86.6 to 85.4, missing forecasts of 86.1. It is the fifth consecutive decline in the index and puts the economy on the edge of a recession this year.
“Companies assessed their current situation to be significantly poorer and expectations are also significantly more pessimistic,” the Ifo Institute said. “The lack of orders has intensified. The core sectors of German industry are struggling.”
After a modest rebound at the start of the year, Germany’s quarterly economic growth fell by 0.1 per cent between April and June, with another quarter of contraction marking the start of a technical recession.
“The economy is currently stuck in what appears to be a self-reinforcing vicious cycle of economic stagnation,” Carsten Brzeski, head of macroeconomics at ING, said.
“The economy is back where it was a year ago: the growth laggard of the eurozone with few signs of an imminent improvement. After the contraction of the economy in the second quarter, all available sentiment indicators for the first two months of the third quarter provide very few reasons for optimism.”
German economic output has been hit by rising energy prices and lower demand for its exports in large economies like China and the US. Two years of high inflation and rising interest rates have dragged on business and consumer confidence, and the growing unpopularity of the country’s ruling coalition has added to woes about federal government underinvestment in infrastructure and public services.
• What’s gone wrong with Germany?
Separately, another survey of the German private sector reported a third consecutive month of falling output in September, led by a weak manufacturing sector, and a drop in hiring across the economy. The decline in the purchasing managers’ index suggests growth contracted by 0.4 per cent in the third quarter, according to Capital Economics.
The Ifo survey, which is based on responses from 9,000 firms across manufacturing, services and retailers, fell across the board, including a two-point drop on business expectations for growth. The manufacturing index slumped to the lowest since July 2020, while the construction sector was the only exception, with sentiment rising modestly by 0.4 points this month.
“Investment has weakened significantly in the first half of the year and the anticipated rebound in consumers’ spending, due to rising real incomes, isn’t happening yet,” Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said. “Other surveys suggest that pessimism is now becoming broad-based in Germany’s economy.”
Last month Volkswagen, a German car group, said it was considering closing two plants — the first time it will have closed factories in Germany, in a move that has been opposed by the Social Democrat-led federal government. New car registrations fell by 28 per cent last month, the largest drop in the eurozone.
Berlin’s coalition government has also hit out at the Italian bank UniCredit, which has built up its stake in Commerzbank, one of Germany’s largest lenders where the state owns a 12 per cent stake. Olaf Scholz, the German chancellor, said on Tuesday that UniCredit’s move was an “unfriendly attack”.
“Hostile takeovers are not a good thing for banks and that is why the German government has clearly positioned itself in this direction,” Scholz said in New York.