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IFO Reports: German Business Confidence Falls Below Forecasts

  • German business confidence dropped in June, with the ifo Business Climate Index falling to 88.6, below expectations, due to lowered future business expectations.
  • Despite some sector improvements, like services and construction, overall economic outlook remains modest with predicted growth of 0.4% in 2024, and minimal impact from Euro 2024.

The mood of German firms fell higher than was anticipated in June. This is the first decline since December. Service sector performance improved, but trade slowed. Euro 2024 is expected to generate additional revenues, but it will have no significant impact on the economy.

Tensions among German businesses fell further than was expected in June making it the first drop in month-to-month in the last year since December 20, ifo Institute said.

The survey conducted monthly of about 9,900 German companies in the fields of trade, manufacturing, service and construction showed an ifo Business Climate Index fell from 89.3 points in May, to 88.6 in June. It was below the expectations of economists for a increase to 89.7.

The drop in overall confidence was mostly due to a rise in expectations of business for the upcoming six months. Expectations gauge dropped between 90.4 in May, to 90 in June. It fell below the forecast 91. The gauge for the current situation was steady at 88.3 barely missing the predicted 88.5.

Manufacturing, business environment slowed down after three months of growth, with firms becoming more sceptical regarding the prospects for the future.

The service industry was the most affected, as the index grew. Service providers assessed their circumstances positive, while the future outlook for the second half of this year was improving.

For trade, the economic situation deteriorated due to a growing doubt regarding the near prospects. However construction has seen a slight increase in its index. This was caused by a less pessimistic outlook however, a dearth of new orders remains an important problem.

“The German economy is having difficulty overcoming stagnation,” the IFo reported.

The German economy’s outlook has increased

This week this week, the ifo Institute moderately raised the forecast of its economic growth rate for Germany for the second quarter of 2024.

The full year of 2024 for the full year 2024, the German Economic Research Institute is forecasting an 0.4 percent growth rate, which is much better than the 0.2 percentage contraction of 2023. This is an 0.2 percent increase over the IFOS’ spring 2024 forecast. In addition, the German economy is forecast to expand by 1.5 percent in 2025, similar to previous forecasts.

The rate of inflation is expected to be 2.2 per cent in 2024 before falling to 1.7 percent in 2025.

According to Munich-based research center that manufactures and exports sector is supporting the economy. Construction may continue to fall in its downward trend, and will suffer a significant fall.

“New hope is currently emerging. The German economy is slowly working its way out of the crisis,” explained the head of ifo’s forecasts professor Timo Wollmershauser.

Euro 2024, not expected to change the game

“The European Football Championship being held in Germany will not bring about a summer fairytale for the German economy,” the ifo said in an earlier study released this month.

Euro 2024 is projected to be able to bring Germany profits from international football fans. Based on the most recent economic forecast of ifo the influx is approximately 0.1 percent of the economy’s output in the second quarter the year.

The ifo institute found that, from a macroeconomic standpoint the type of events generally have a minimal influence, excluding tourism.

“Although domestic consumers will also briefly spend more in the hospitality and food retail sectors during the Championship, they will reduce their spending elsewhere, so that private consumption as a whole will likely remain unaffected. That is at least what experience from the 2006 World Cup suggests,” Professor Wollmershauser declared.

Ifo researcher Gerome Wolf has pointed this out. “However, the effect will only be short-lived, meaning that service exports due to tourists returning home after the end of the Euro 2024 are likely to fall again in the third quarter and, on balance, remain the same.”

Reactions to market

German assets had a low response to the ifo business climate report.

The yields on Bunds remained constant at 2.40 in Monday’s somewhat tense trading session.

The DAX index was up 0.7 10% at 10:00 a.m. CET. The index retreated from the previous 0.5 percentage decline, driven by the gains seen in the automobile manufacturing industry. Porsche AG, BMW, Volkswagen and Mercedes-Benz AG rose by 3.2 percent, 3%, 2.2%, and 1.8 percentage and 1.8%, respectively.

In addition to the top performing companies, Puma along with Fresenius Medical Care increased by 2.1 percentage and 2.4 percent, respectively.

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