Germany’s economic outlook is expected to face substantial challenges in the coming six months according to the latest German Ifo Business Climate Index, which showed a gradual deceleration in the wake of global trade contraction. The Business Climate reading, a leading indicator of activity, declined to 108.2 from the prior month’s reading of 108.5 with expansion continuing to slow. Generally speaking, the trend for business outlooks has begun to incorporate the concerning views of a broader downturn in China and shrinking international trade. Between the most recent ECB decision to leave monetary policy unchanged along with further loosening of monetary policy from China, the stage is set for a continued bigger picture decline amongst the leading global economies. In spite of the worsening macroeconomic conditions, Ifo President Hans-Wern Sinn is quite optimistic that the local German business climate and trade conditions will improve and spring back to life in coming measuring periods. However, data from the Federal Statistic Office reported in August prominently displayed sliding manufacturing orders and stumbling industrial production after a steep decline in exports.
China alone cannot be attributed to losses in the German export economy and while the scandal at Volkswagen (DE:VOWG_p) continues to drag on output, it is also not the only reason for the broad weakness prevalent across leading indicators. Employment remains strong and while the refugee crisis might be a drag on the Government’s budget over the short-term, long-term implications are still unclear. The major factor behind flagging growth continues to be the state of the global economy and notably the pullback in the Euro Area economy. Foreign direct investment in Germany is forecast to miss expectations to the downside with the Government responding by downgrading the growth outlook from 1.80% to 1.70% for fiscal 2015. These factors are likely causing business leaders to rethink investment in core businesses especially amid a weakening economic backdrop. Nevertheless, most of the burden sits squarely with ECB President Mario Draghi as he is tasked with restoring growth to the Euro Area region, meaning upcoming adjustments to policy that will likely include expanded easing and possible deposit rate cuts in an effort to improve economic conditions.