There are increasing signs of an impending recession.

The mood in the executive floors of the German economy deteriorated significantly in July, as the business climate index published on Monday by the Munich Ifo Institute shows.

The barometer, which is based on a monthly survey of around 9,000 companies and is considered the most important leading indicator for the German economy, fell to 88.6 points after 92.2 points in June.

Svea Junge

Editor in Business.

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This is the lowest value since July 2020. "High energy prices and the threat of gas shortages are weighing on the economy," said Ifo President Clemens Fuest.

"Germany is on the threshold of recession."

The pessimism ran through all sectors.

The companies were not only less satisfied with their current business situation, they also expected "significantly worse business" in the coming months.

Industrial companies looked to the future with more concern than they did in April 2020, shortly after the outbreak of the corona pandemic.

Even in the service sector, where confidence had recently prevailed, especially in the hospitality and tourism sectors, expectations collapsed in July.

"Above all, the fear of a prolonged gas supply stop in connection with the maintenance of Nord Stream 1 is likely to have clouded the business prospects of many companies at the time of the survey," commented KfW Chief Economist Fritzi Köhler-Geib.

There was initially no complete stop to deliveries, but the uncertainty about the energy supply still remains “enormous”.

Multiple burdens on the economy

In addition, the high prices caused the demand for goods and services to decline, said Dekabank chief Volskwirt Ulrich Kater.

Companies reduced supply because transport problems and inflation made production unpredictable.

"The German economy is at least facing a phase of stagnation, if not even contraction," warned Kater.

Most recently, the Bundesbank also lowered its expectations for the performance of the German economy, i.e. for the development of gross domestic product (GDP).

"From today's perspective, GDP growth in the current quarter is likely to be somewhat weaker than expected in the base scenario of the Bundesbank projection of June 2022," says the central bank's July monthly report published on Friday

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In the past second quarter, on the other hand, German economic output is likely to have "roughly stagnated" according to central bankers' estimates.

In the June report, the Bundesbank still assumed that GDP would "grow slightly" in the second quarter despite the difficult environment.

The Ifo index is not the first indicator to point to a downturn.

The purchasing managers' index for Germany published by S&P Global on Friday also fell by 3.3 points to 48 points, slipping below the growth threshold of 50 points and to the lowest value in more than two years.

Downward trend also in the euro zone

"After an upward thrust triggered by the easing of the corona restrictions, the headwind from several directions ensured that the German economy had to record growth losses again in July for the first time this year," said S&P Global economist Paul Smith.

Smith said the continued delays in delivery, uncertainty caused by the war in Ukraine and inflation, all of which are having a negative impact on customers' willingness to spend, are to blame.

The barometer for the euro area as a whole was also unable to stay above the 50 point mark and fell by 2.6 points to 49.6 points.

S&P Global chief economist Chris Williamson therefore expects economic output in the euro area to decline by 0.1 percent in the third quarter.

"Even if the decline is still modest at the moment, the sharp decline in new orders, falling order backlogs and the deteriorating business outlook indicate that the downward trend will accelerate further over the summer," he said.

Other economists see it that way too.

"General economic activity in Euroland probably fell into the stagnation zone in the second quarter and the purchasing manager indices at the start of the third quarter actually point to a deterioration against the background of the existing problems," commented Dekabank economist Christian Melzer.

Thomas Gitzel, chief economist at Liechtenstein's VP Bank, made a similar statement.

"The recession is brewing.

What's too much is too much," he said.