German economic dynamics

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Data released on Wednesday showed that German business expectations fell sharply in August due to supply chain disruptions and concerns about the re-emergence of Covid-19 infection weighing on the euro zone’s largest economy’s recovery from the pandemic.

A widely watched business climate index developed by the Ifo Institute in Munich dropped from 100.8 last month to 99.4 in August. This is the second consecutive month of decline after steady improvement since the beginning of this year.

Especially dragged down by business expectations for the next six months; the index fell from 101.2 in July to a six-month low of 97.5. Economists surveyed by Reuters had expected the number to drop slightly to 100.

“The supply bottleneck of intermediate products in the manufacturing industry and concerns about the increase in the number of infections are putting pressure on the economy,” said Clemens Fuest, director of the ifo Institute.

He added that because of concerns about the possibility of a new lockdown, “worries in the hotel and tourism industry are increasing.”

Combined with the recent weakness in the German Zew sentiment index and Purchasing Manager SurveyCarsten Brzeski, global head of macroeconomics at ING Bank, said the data showed that “Germany lost momentum in the second half of the year”.

“If the hard data stabilizes with the soft indicators, the economic recovery to pre-crisis levels will be delayed,” he warned.

In contrast, companies reported a strong improvement in current conditions, and the corresponding index rose to the highest level since May 2019.

Capital Economics chief European economist Andrew Kenningham said that this shows that the German economy is “still strong” and that the third quarter GDP is expected to grow “very strongly” compared to the previous three months. About 3%. The German economy grew by 1.6% in the second quarter.

However, “supply chain difficulties will continue to hinder manufacturing, and the Delta variant will inhibit the prospects of the hotel industry,” he said. Although he previously predicted a GDP growth rate of 4% in 2021, he has lowered it to 3% in light of the recent deterioration in sentiment data.

The decline in sentiment in the manufacturing industry has been particularly pronounced. Although companies report that demand has weakened, they are basically optimistic about the current situation. But their outlook for the next few months has fallen sharply; the corresponding index hit its lowest level since November last year.

Fuest said that companies in the service industry are reporting better conditions than in previous months, but their optimism about the future “has faded.”

Construction bucked the trend; the company reported better current business and improved expectations.Like many other advanced economies, Germany is experiencing Strong housing demand And rapid housing price growth.