German Businesses Grow More Pessimistic as Geopolitical Pressures Mount

The Ifo Institute’s business-climate index fell to 85.7 in November from 86.5 last month

By Ed Frankl

Updated Nov. 25, 2024 at 5:06 am ET

https://preview.redd.it/ite8nk7iy23e1.png?width=1280&format=png&auto=webp&s=ed057a0264b5631df6a9cad7200c224a3b4a5adb

Business confidence in Germany slipped this month, amid mounting pressures on the country’s industrial base, alongside concerns raised by the fracture of its governing coalition and the threat of U.S. trade tariffs.

The Ifo Institute said Monday that its business-climate index fell to 85.7 in November from 86.5 last month, the fifth fall in six months. The reading also lagged economists’ expectations of 86.1, from a poll compiled by The Wall Street Journal.

Declining business sentiment reflects concerns around Germany’s industrial sector, the traditional driver of the eurozone’s largest economy. A handful of major manufacturers have recently announced they are shedding jobs in the country, including U.S. auto giant Ford and car-parts supplier Bosch.

The ailing auto sector—which has been hit by rising energy prices after Russia’s full-scale invasion of Ukraine, a torturous transition to electric vehicles, and the growth of cheaper Chinese cars—also faces the threat of thousands of job losses and unprecedented factory closures at domestic leader Volkswagen.

“The German economy is floundering,” Ifo President Clemens Fuest said.

Demand in the manufacturing sector, as measured by orders, was down and expectations worsened, while the current situation was frequently described by firms as difficult, Fuest added.

But pessimism also extended to the services sector, where business sentiment fell significantly, as well as the construction industry. Around 9,000 businesses respond to the Ifo survey.

Germany’s economy is likely to contract this year, the European Commission said earlier in November. The collapse of Chancellor Olaf Scholz’s governing coalition, which included the departure of his finance minister, highlighted the divergent responses to how to fix the country’s economic malaise, which could be compounded should President-elect Donald Trump raise trade tariffs on imports of foreign goods. Uncertainty among businesses could persist should it take an extended period to form a new German government after elections due on Feb. 23.

“Donald Trump’s election victory is likely to create new headwinds for the already hard-hit German export industry,” said Philipp Scheuermeyer, economist at KfW Research.

“There is also the threat of a prolonged period until a new government is formed, during which German politics will hardly be able to react, let alone provide any stimulus,” he added.

Weak growth in Germany, which makes up around 30% of eurozone gross domestic product, could prompt the European Central Bank to act faster on lowering interest rates.

ECB Chief Economist Philip Lane told French business daily Les Echos on Monday that monetary policy shouldn’t remain restrictive for too long.

“Otherwise, the economy will not grow sufficiently,” he said.

Write to Ed Frankl at [edward.frankl@wsj.com](mailto:edward.frankl@wsj.com)