German Ifo business climate index falls in August, economic growth likely to contract again in Q3

The German Ifo business climate index dropped in August. The index fell to 94.3 from 95.8, as consensus expectations of 95.1. The assessment of the current business situation has eased greatly to 97.3 from 99.6; however, expectations for the coming six months have also dropped greatly to 91.3 from 92.1.

The fall of the current business situation has noticeably increased the risk that the GDP growth with contract for the second consecutive time in the third quarter. This would lead to a technical recession. The business climate in the service sector dropped even more sharply in August than in manufacturing.

While it had greatly decoupled itself from the downturn in manufacturing until spring, the trend is now also clearly pointing downwards in the service sector. This is also underpinned by the fact that industrial firms have been expecting the figure of the employees to fall for several months now. The downturn is starting to leave its mark on the successful German labor market, which is putting the brakes on the domestic economy and the services sector dependent on it.

The German economy is expected to stay in a grey area between sluggish growth and recession in the coming year as well, noted Commerzbank in a research report. This is mainly due to the recent escalation of the trade war between China and the U.S. affirms the view that the conflict threatens to become permanent.

“We expect the German GDP to grow by only 0.8 percent in 2020 which after adjusting for the unusually high number of working days corresponds to a mere 0.5 percent”, added Commerzbank.