Gloomy Ifo fuels fears of second German recession in a year

FILE PHOTO: A general view of a weekly market in Berlin

By Maria Martinez

BERLIN (Reuters) -The mood among German businesses deteriorated more than expected in August, data showed, falling for the fourth month in a row and adding to fears that the economy may be heading for its second recession inside a year.

The Ifo institute said on Friday that its business climate index stood at 85.7, down from 87.4 in July. Analysts polled by Reuters had forecast an August reading of 86.7.

Assessments of the current situation fell to their lowest level since August 2020 and companies' expectations for the next six months were also increasingly pessimistic.

"The German economy is not out of the woods yet," Ifo president Clemens Fuest said.

Beset by high inflation and financing costs and a drop in exports that has hit the country's industrial sector hard, Germany's economy fell into recession last winter.

The economy posted zero growth in the second quarter compared to the previous three months, separate data from the statistics office showed on Friday.

Finance Minister Christian Lindner that, after a third consecutive quarter of contraction or stagnation, "new economic impulses are more important than ever".

The Growth Opportunities Act, a programme of corporate tax relief worth billions of euros, would be a first step in that agenda, he said on messaging platform X, formerly known as Twitter.

Germany's coalition government last week failed to agree on a framework for that programme.

German Economics Minister Robert Habeck agreed that the programme was an important step to attract investment.

"The restrictive interest rate environment and the weak global economy - especially the developments in China - make it difficult for us as an export nation said," he said. "Targeted incentives for investment, both private and public, are important."

The Ifo survey showed sentiment among German managers had become more pessimistic across all sectors in August.

Weak new orders were the main reason, according to the institute's head of surveys, Klaus Wohlrabe.

Claus Niegsch, an analyst at DZ Bank, said high interest rates, stubbornly high prices and sluggish foreign trade would continue to weigh on Germany's economy in the second half of the year.

"This means we are likely to slip into another recession in the last two quarters of this year before a recovery can begin next year," he said.

The Ifo survey chimed with flash PMI data released earlier this week which showed German business activity contracted at its fastest pace for more than three years in August.

"Both surveys did come in below expectations and will do nothing to dispel the sense of gloom about Germany's economic prospects," said Andrew Kenningham, chief Europe economist at Capital Economics.

They point to the economy contracting again in the third quarter after stabilising in the second, he said, agreeing with Niegsch that the economy would probably shrink in both the third and fourth quarters.

"Today's data pours more cold water on those hoping that the country's economic weakness will be short-lived," added ING's global head of macro, Carsten Brzeski.

(Reporting by Maria Martinez, Editing by Friederike Heine, Mark Potter, John Stonestreet and Christina Fincher)