German: Business morale worsens – what is at risk for industry?

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German business confidence fell further in November, deepening concerns over the nation’s industrial competitiveness amid ongoing economic challenges.

The Ifo Business Climate Index, a widely monitored indicator of economic sentiment based on around 9,000 business surveys, declined to 85.7 in November from 86.5 in October, missing market expectations of 86. This marks the second-worst reading since January. The sub-index for current conditions slipped to 84.3 from 85.7, while business expectations edged down to 87.2 from 87.3.

“The mood among companies in Germany has deteriorated, and the German economy is lacking strength,” said Clemens Fuest, president of the Ifo Institute.

Industrial competitiveness under strain

According to the Ifo Institute, German industrial companies increasingly view their competitive position as worsening. The majority of firms report that their position has deteriorated not only domestically but also within the European Union (EU) and globally.

While Italian and French industrial companies provided assessments above the EU average, Germany found itself at the bottom of the rankings, along with Belgium, Austria and Finland. Ifo researchers highlighted the severe decline in energy-intensive industrial sectors as particularly concerning.

“The assessment of one’s own competitive position is very negative in all industrial sectors, especially when it comes to foreign markets,” noted Stefan Sauer, an Ifo expert.

Sauer added that the competitive position of German industry has experienced its sharpest decline in nearly 30 years. “The analysis shows that the advantages of German industry on international markets are increasingly dwindling. The competitive position has deteriorated more sharply in the past two years than ever before since the survey began in 1994.”

Structural challenges weigh heavily

German companies cited a range of challenges driving their pessimism. These include high energy prices, bureaucratic hurdles, elevated costs for intermediate products, and tax burdens. Structural issues, such as a lack of skilled labour and an ageing workforce, were also highlighted as significant barriers to competitiveness.

The Ifo Institute has called for reforms to state funding allocations for municipalities to alleviate bureaucratic inefficiencies.

“Complex bureaucratic requirements often pose major problems for small municipalities in particular,” said Sarah Necker, director of the Ifo Center for Social Market Economy in Fürth. “It would make more sense to increasingly replace funding programmes with regular lump-sum payments to municipalities.”

Private sector activity hits nine-month low

Adding to the economic woes, Germany’s private sector activity fell to its lowest level in nine months, according to the latest Purchasing Managers’ Index (PMI) surveys. Manufacturing conditions remain mired in recession, and the services sector contracted for the first time since February 2024.

“Companies are also dealing with rising costs, especially wages. This was highlighted by the big negotiated pay increase in the third quarter, which was the highest since 1993. While some of these costs were passed on to customers, it looks like the sector is feeling the heat,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Political uncertainty has compounded the economic challenges, with the upcoming snap elections in Germany on 23 February 2024 adding to the volatility.

“The political uncertainty, which has increased since Donald Trump’s election as US president and the announcement of snap elections in Germany, isn’t helping. However, the modest increase in the future output index might reflect some hope that the next German government will manage to turn the economy around with bold measures, for example by reforming the debt break,” said Dr de la Rubia.