German business sentiment experienced an unexpected decline in September, according to a recent survey by the Ifo institute. This development presents a setback for Chancellor Friedrich Merz’s efforts to revitalize Europe’s leading economy. The Ifo confidence barometer dropped to 87.7 points from 88.9 in August, breaking a streak of eight consecutive increases. Analysts had anticipated a slight rise to 89.2 points.
The decline in business confidence was attributed to a decrease in both the assessment of the current situation and expectations for the future. This shift ends a series of positive data releases that had raised hopes for a gradual recovery of the German economy. Ifo president Clemens Fuest noted that the optimism among capital goods manufacturers seen in the previous month has dissipated, and the prospects for an economic recovery have suffered a setback.
All sectors, except construction which saw a slight increase, were affected by the decline. The services sector, in particular, was impacted by pessimism among transport and logistics firms. LBBW bank analyst Elmar Voelker described the survey results as an unexpected blow to the German economy, suggesting that it may remain in a state of near stagnation until at least the end of the year.
Germany’s economy has been struggling due to patchy global growth, high production costs, and intense competition from China. The situation was further exacerbated by the tariffs imposed by US President Donald Trump in April, which have hit Europe’s traditional export powerhouse. Merz’s ruling coalition has pledged to invest hundreds of billions in infrastructure over the coming years to boost growth. However, economists have warned that the impact will be limited without reforms to make German industry more competitive.
Leading economic institutes have recently revised their growth forecasts for the year to just above zero percent, citing the impact of Trump’s tariffs and the delayed surge in German government spending. The decline in business sentiment underscores the challenges facing the German economy and the need for effective policies to stimulate growth and competitiveness.
