German business confidence deteriorated to its worst level since the early months of the pandemic, on growing concerns that record inflation and limited energy supplies from Russia will cause a recession in Europe's largest economy.
The expectations index published on Monday by the Munich-based Ifo Institute fell to 80.3 in July from 85.8 in June and well below the 83.0 forecast by analysts. The current account index also declined.
«Germany is on the brink of recession,» Ifo president Clemens Füst assessed, adding: «High energy prices and the threat of gas shortages are weighing on the economy. Companies expect significantly worse business activity in the coming months.».
The report reflects the increasingly bleak picture in Germany, whose recovery from the pandemic was already elusive due to runaway inflation and parts shortages exacerbated by the war in Ukraine. A private sector activity index from S&P Global signaled that the economy began to contract in July for the first time this year.
The Bundesbank warned last week that price increases are likely to remain high in the coming months, with prices continuing to rise even in September, when the temporary relief measures will end. Fears over Russian gas deliveries are «weighing on the outlook» for German growth, the country's central bank also said in its monthly report.
A key risk for Germany, which imports a large share of its gas from Russia, is that a further slowdown or stagnation of its energy supply could drive inflation higher.
Already squeezed by rising prices, consumers and companies now face higher interest rates after the European Central Bank last week raised borrowing costs for the first time in more than a decade.
Even after achieving a larger-than-expected initial rate hike, the ECB may not raise rates much, Governing Council member Martins Kazaks said in an interview.
Fuest estimated that energy prices will play a more important role in shaping Germany's economy in the coming months. «The rise of the ECB is in some ways already priced in,» he added.
