(Bloomberg) -- Germany’s business outlook unexpectedly fell, adding to concerns over the rebound of Europe’s biggest economy.
The Ifo institute’s expectation barometer dropped to 86.9 in July from a revised 88.8 in the previous month, defying economists’ predictions of a slight improvement. The gauge of current conditions and the overall measure also declined.
“German business confidence is deteriorating and there is a lot of pessimism regarding the coming months,” Ifo President Clemens Fuest told Bloomberg Television’s Kriti Gupta on Thursday. “The overall outlook is rather bleak.”
The decreasing business confidence adds to Wednesday’s unexpected plunge of the S&P Global Purchasing Managers’ Index, highlighting the difficulties of Germany’s economy to recover after two years of near-stagnation.
What Bloomberg Economics Says...
“Worryingly, business morale has not only dropped in the industrial sector, where a turnaround appears increasingly distant. It has also fallen in the services sector, albeit from a higher level. We still think that growth might be slightly higher in the last two quarters of the year than it was in the first two. But the downside risks to our near-term forecast are notably increasing.”
—Martin Ademmer, economist. For full React, click here
“The recent weak economic indicators put a big question mark over the significant economic recovery that many economists expect for the second half of the year,” said Commerzbank Chief Economist Joerg Kraemer said, predicting “only an anemic economic upswing.”
The services sector, which has been keeping Germany’s economic prospects afloat, has benefitted from somewhat stable private consumption and slightly slower inflation. But the main brake on the country’s recovery remains the manufacturing sector.
Industrial production and factory orders fell in May, prompting the Bundesbank to warn this week that second-quarter growth was probably weaker than anticipated. The German central bank still expects a slow strengthening in the third quarter, although it recognizes that the “spell of weak demand has not yet been fully overcome.”
With interest rates left unchanged at July’s European Central Bank meeting, borrowing costs remain high. Foreign demand, especially from China, is not picking up at the expected pace, weighing on the export nation.
Markets are currently pricing in two quarter-point rate cuts — in September and December — Fuest said, adding that “if the ECB does more — maybe as a reaction to this weak economic development — that might be a supporting factor, supporting not just the manufacturing, but construction” as well.
Structural problems are partly to blame for Germany’s economic woes, according to research by Bloomberg Economics, which shows that the country’s industrial sector may have suffered a permanent hit, with half of an estimated 7% shortfall in productive capacity persisting.
--With assistance from Alexander Weber, Kristian Siedenburg and Joel Rinneby.
(Updates with Fuest on Bloomberg TV starting in third paragraph)
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