BERLIN: German business morale fell to its lowest level since November 2014 in June, a survey showed on Monday, adding weight to expectations that Europe’s largest economy contracted in the second quarter.

The Ifo institute said its business climate index deteriorated for the third month in a row, to 97.4 in June from 97.9 in May. That was slightly above a consensus forecast for 97.2.

“The German economy is heading for the doldrums,” Ifo President Clemens Fuest said, adding that the business climate in both the manufacturing and services sectors had worsened.

After nine successive years of growth, the German economy is struggling as trade disputes and a cooling world economy hurt its export-dependent manufacturers and as Britain’s delayed exit from the European Union creates uncertainties.

The Bundesbank said this month it expects the economy to contract slightly in the second quarter after an expansion of 0.4 per cent between January and March. The government has halved its 2019 growth forecast to 0.5pc after an expansion of 1.5pc in 2018, the weakest rate in five years.

Ifo economist Klaus Wohlrabe said the trade conflict between the United States and China — the world’s two largest economies — was the main source of uncertainty for German businesses.

He said he did not expect a recession, a view also held by analysts.

“All told, we expect the German economy to slow to little more than a crawl in the second quarter,” Christina Iacovides of Capital Economics wrote in a note.

‘Fear of losing’

An index measuring managers’ assessment of their current situation rose slightly while another gauging expectations fell to its lowest level since February.

That suggested the slump in the headline reading to levels not seen since the eurozone debt crisis was driven by concerns that trade conflicts between the United States and both China and the European Union could worsen and further dampen exports.

“Fear of losing. This is the best summary of the current state of Germany’s businesses,” Carsten Brzeski of ING wrote in a note.

The services sector, buoyed by a solid domestic economy, has been providing impetus as industry shrinks, but some economists fear the recession in the manufacturing sector could spread.

The economy has been relying on private consumption for growth, a cycle supported by a robust labour market, low interest rates and rising wages. Separate data published on Monday showed that real wages rose at a slower pace in the first quarter, however, which could dampen Germans’ appetite to spend.

Higher government spending has also helped support growth but critics of Chancellor Angela Merkel’s right-left coalition say it could borrow money to add more impetus. Business lobby groups have urged Merkel to cut corporate taxes and some economists accuse her of being complacent about the economy.

The Finance Ministry said on Monday the government would stick to its no-new-debt policy until 2023 but planned to increase public spending by 1pc next year.

Brzeski said he expected the services sector to continue providing impetus for the broader economy and that the slowdown in the manufacturing sector would bottom out.

The European Central Bank’s decision not to raise interest rates in the next year and to open the door to cutting them or buying more bonds could cement the status of consumption as the main growth driver in Germany, he added.

“A bottoming-out is in sight for German industry,” Brzeski said. “The recent u-turn of the ECB towards more dovishness indicates that financing conditions for new domestic investments will remain favourable. However, let’s be clear, a bottoming out is still far from being a strong rebound.”

Published in Dawn, June 25th, 2019