German Business Expectations Slide Ahead of Snap Election
(Bloomberg) -- German companies unexpectedly became more pessimistic at the start of the year, adding to doubts before a snap election taking place next month that the country can quickly return to growth.
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An expectations index by the Ifo institute fell to 84.2 in January from 84.4 the previous month. Economists had predicted a minor uptick. A measure of current conditions improved, thanks in particular to a stronger current performance by services.
“With Trump increasing uncertainty, with political uncertainty in Germany due to the elections ahead, companies wait before they invest,” Ifo President Clemens Fuest told Bloomberg Television on Monday. “So it will be another difficult year.”
German just endured a second straight year of contraction, weighed down primarily by its struggling manufacturing sector. Soft foreign demand and high borrowing costs have contributed to the weakness, but long-standing problems like the aging workforce and excessive dependence on China are increasingly coming to the fore.
They’ve become prominent topics of debate before the the Feb. 23 federal election that’ll probably see Chancellor Olaf Scholz ousted by Friedrich Merz, who leads the conservative CDU/CSU bloc. Whether to revisit strict limits on public borrowing will be one of the first questions any new government will face.
“The top priority is to come up with an economic reform program that addresses some structural issues — energy prices, high taxes, regulation, bureaucracy,” Fuest said. “This is needed more than short-term stimulus.”
What Bloomberg Economics Says...
“The outlook remains gloomy, in particular for the troubled manufacturing sector where business expectations deteriorated further. Following two years of contraction, we see German GDP expanding modestly in 2025 thanks to higher activity in the services sector. Downside risks to the growth outlook dominate – escalating trade conflicts would be a further blow to the export-focused German industry.”
—Martin Ademmer, economist. Click here for full REACT
Business surveys by S&P Global showed the gloom in Europe’s biggest economy abating somewhat in January, with an index of private-sector activity climbing just above the threshold indicating expansion. The Bundesbank and other forecasters still only expect muted growth this year, with US President Donald Trump’s threat to impose tariffs presenting a major risk to the outlook.
The European Central Bank is about to lend a helping hand, as it’s widely expected to cut interest rates for fourth straight time on Thursday. Further reductions are anticipated this year, at least until borrowing costs stop hampering economic activity.
--With assistance from Jana Randow, Mark Schroers, Kristian Siedenburg and Joel Rinneby.
(Updates with Bloomberg Economics.)
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