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Germany's business confidence plummets

July 25, 2022

German businesses have been losing confidence in the current economic climate as growth prospects worsen. The ifo Institute that published the survey pointed to high energy prices.

A stock broker sits on the trading floor of the stock market in Frankfurt, Germany
The fear of skyrocketing energy prices has sent a dark cloud over German businessesImage: Arne Dedert/dpa/picture alliance

Morale among German businesses has fallen as rising prices for goods and fuel dampen growth prospects, according to a survey by the German ifo institute think tank published on Monday.

"High energy prices and the threat of gas scarcity are a burden on growth," ifo President Clemens Fuest said. "Germany is standing on the cusp of a recession."

What did the survey reveal?

The ifo business climate index fell almost four points from 92.2 in June to 88.6 in July. The index measures businesses' confidence in the current climate in comparison to a reference point set in 2015.

It is based on a survey of around 9,000 managers from across the German business community.

The fall in confidence represents a new downward trend following over a year of recovery since the lows seen in early 2020 when the coronavirus pandemic broke out.

July's confidence index number represents the lowest point since June 2020.

The looming threat of a gas crisis

The think tank pointed to the skyrocketing cost of energy in Germany, and across Europe, exacerbated by Russian threats of reducing or cutting gas supplies.

"The massive slump in the ifo business climate survey reflects the fear among German businesses of a gas crisis," Jörg Krämer, chief economist at Commerzbank told Reuters.

He added that the survey results point to a coming downturn in the German economy, but the question of how bad that will be is "above all in [Russian President Vladimir] Putin's hands."

Russia recently returned the Nord Stream 1 gas pipeline to Germany to operation after a 10-day shutdown for repairs. The pipeline came back online at 40% capacity, but there had been fears that it would not be turned back on at all.

Germany is heavily reliant on Russian gas and the threat to its supply has brought up the question of whether Germans will be able to afford to heat their homes over the winter.

The government has said it will increase its gas storage requirements and take measures to save more gas. It also announced that it would bail out the energy supplier Uniper, which could lead to higher prices.

ab/rs (dpa, Reuters)