Germany’s business confidence has plummeted to its weakest level in over four years, reflecting growing pessimism about 2025 as the country grapples with structural challenges and sluggish investment.
The ifo Business Climate Index, a key measure of economic sentiment, dropped to 84.7 points in December 2024, down from a revised 85.6 points in November. This reading marks the lowest level since May 2020, when the COVID-19 pandemic severely disrupted the economy. Analysts had anticipated a steadier figure of 85.6 points.
Sectoral Outlook: Widespread Gloom
The decline was driven largely by more pessimistic future expectations across major sectors, including manufacturing, services, and retail trade. Despite a slight improvement in the construction sector’s current assessment, its outlook remains grim.
“The weakness of the German economy has become chronic,” said Clemens Fuest, President of the ifo Institute.
While the subindex for current business conditions rose slightly from 84.3 to 85.1 points, surpassing expectations, the expectations subindex—a gauge of sentiment for the months ahead—fell sharply to 84.4 points, its lowest level since February 2024.
Persistent Economic Challenges
Manufacturing, a cornerstone of Germany’s export-driven economy, is feeling the strain of declining global competitiveness, particularly outside Europe. Around 31.8% of manufacturers foresee further deterioration in 2025, with only 15.7% expressing optimism. The construction sector reflects similar concerns, with over half of firms expecting worsening conditions.
Retail and service industries are also bracing for tough times. Among retailers, 42.1% anticipate a decline, while just 7.9% expect improvement. The service sector offers a slightly brighter picture, but most businesses predict little to no change.
Lara Zarges, an ifo economic expert, highlighted “structural location problems and high uncertainty regarding economic policy” as key factors causing companies to delay investments.
Economic Outlook and Risks
Germany’s economic outlook remains fraught. Last week, the ifo Institute downgraded its growth forecasts, predicting a 0.1% contraction in 2024, following a 0.3% decline this year. Modest growth of 0.4% is expected in 2025, with gradual improvement to 0.8% by 2026.
However, risks of “creeping deindustrialisation” loom large. The ifo Institute warned that the share of manufacturing in Germany’s GDP could shrink as companies relocate production overseas. Weak productivity growth further exacerbates concerns, with industrial output giving way to less productive service sectors.
Market Reactions
The worsening economic sentiment weighed on financial markets. The euro fell 0.3% on Tuesday, trading below $1.05, while yields on 10-year German Bunds dropped to 2.22% as investors sought safe-haven assets.
Germany’s benchmark DAX index remained largely flat after a 0.4% decline the previous day. Notable performers included Airbus SE and Siemens AG, while Deutsche Post AG and Rheinmetall AG saw significant declines.
As Europe’s largest economy struggles to navigate persistent challenges, the road to recovery appears long and uncertain.
