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Germany ‘on Brink of Recession’ as Business Confidence Falls


German business confidence deteriorated to the worst level since the early months of the pandemic on growing concerns that record inflation and limited energy supplies from Russia will throw Europe’s biggest economy into a downturn.

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German business confidence deteriorated to the worst level since the early months of the pandemic on growing concerns that record inflation and limited energy supplies from Russia will throw Europe’s biggest economy into a downturn.

A gauge of expectations released Monday by the Munich-based Ifo Institute fell to 80.3 in July from 85.8 in June. Analysts had predicted a drop to 83.0. An index of current conditions also dropped.

“Germany is on the brink of a recession,” Ifo President Clemens Fuest said. “High energy prices and the threat of gas shortages are weighing on the economy. Companies are expecting significantly worse business activity in the coming months.” 

The report reflects mounting gloom in Germany, whose pandemic recovery was already muted because of rampant inflation and component shortages exacerbated by the war in Ukraine. A gauge of private-sector activity by S&P Global signaled the economy began contracting in July for the first time this year.

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The Bundesbank warned last week that price growth is likely to remain elevated in the coming months, and may even resume its ascent in September as temporary relief measures end. Fears over Russian gas deliveries are “weighing on the outlook” for German growth, it said in its monthly report.

A key risk for Germany, which imports a large share of its natural gas from Russia, is that further slowdowns or standstills in energy supplies could drive inflation higher still.

Already squeezed by rising prices, consumers and companies must now grapple with higher interest rates after the European Central Bank lifted borrowing costs for the first time in more than a decade last week.

Even after delivering a bigger-than-expected initial rate increase, the ECB may not be done with outsized hikes, Governing Council member Martins Kazaks said in an interview.

Fuest said energy prices will play a more important role in shaping Germany’s economy over the coming months. “The hike of the ECB is in a way already priced in,” he said.

(Updates with ECB official, Fuest in last two paragraphs.)



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