German Economy Stagnates Amidst Ongoing Challenges

The Ifo Business Climate Index for February has shown no improvement, remaining steady at a revised 85.2 points, the same as January. This stagnation raises concerns as experts suggest that Germany may face its first three consecutive years of economic contraction since the establishment of the Federal Republic.

According to the Munich-based Ifo Institute, which surveyed approximately 9,000 executives, the business sentiment among company leaders has not shifted positively as the year begins, providing no economic boost for the new government. Economists surveyed by Reuters had anticipated a slight rise in the index to 85.8 points. While companies expressed a more pessimistic view of their current situation, there was a slight uptick in their outlook for the months ahead.

Ifo President Clemens Fuest remarked that the German economy appears to be in a holding pattern. Commerzbank Chief Economist Jörg Krämer indicated that any upward movement in the economy is unlikely until spring at the earliest. He noted that differing economic policies among future coalition partners are dampening hopes for a significant economic policy reset, which is urgently needed following a decade of decline in the country's competitive landscape.

Jens-Oliver Niklasch, an expert from LBBW, emphasized that the current Ifo data highlights the economy's stagnation and the urgent need for growth-oriented reforms. He warned that achieving a turnaround will take time, predicting further contraction in economic output for the current year. Notably, three consecutive years of recession would be unprecedented in Germany's post-war history.

Ifo's economic chief Klaus Wohlrabe also conveyed a cautious outlook, suggesting that stagnation is likely for the gross domestic product (GDP) in the first quarter. While the index showed improvements in the industrial, retail, and construction sectors, the service industry experienced a decline in sentiment. Fuest pointed out that skepticism is particularly rising in the transport and logistics sectors.

In the final quarter of 2024, the German economy contracted, and experts predict only minimal growth for 2025 following two years of recession. Additionally, the imposition of tariffs by the United States under the new administration of President Donald Trump on European imports is expected to adversely affect Germany, known as the export champion, further hindering economic growth.