German economic climate index signals freeze

The Ifo Business Climate indicator for Germany is an indicator considered very relevant in the German economic world, capable of predicting the economic situation with some attention.

This index unexpectedly fell to a three-month low of 86.4 in December 2023 from a downwardly revised 87.2 in November, compared to the market forecast of 87.8, so the index not only fell, but it did it unexpectedly.

Companies became more pessimistic about their expectations for the coming months (84.3 vs. 85.1) and about their current business situation (88.5, the lowest since August 2020, vs. 89.4). Breaking down the data by sector, sentiment worsened among producers (-17.2 vs. -13.8), traders (-26.6 vs. -22.2), and builders (-33.3 vs. -29.5), but improved slightly among service providers (-1.7 vs. -2.5). Here is the relevant graph:

If we see it from a ten-year perspective, we see how, discarding COVID, an exceptional event, the value of the index is at its lowest, and something important has broken in companies’ confidence in the future of the economy.

“As the year draws to a close, the German economy remains weak and shows a demand problem,” said Ifo president Clemens Fuest. The data points to a slight contraction in GDP in the fourth quarter, he added.

The policies of the Scholz government, with the austerity and reduction of expenses imposed after the decision of the Constitutional Court, together with the energy policies, will certainly not favor the improvement of the economic climate in the near future.