With President Donald Trump threatening to turn a tit-for-tat tariff battle into a full trade war, targeting some of Germany’s key industries, business confidence in the eurozone’s top economy sunk in June to its lowest in more than a year as the mood among its top business chiefs darkens.
The four sectors – manufacturing, services, trade and construction – measured by the Munich-based Ifo institute declined across the month of June.
Ifo said its business climate index fell to 101.8, the lowest level since May 2017 and the index has now fallen in six of the last seven months as the eurozone recovery that began at the end of last year grinds to a halt.
The readings added to signs that Europe’s biggest economy is cooling after a strong 2017, Ifo economist Klaus Wohlrabe said that, “the boom is over. The discussion about a trade war is weighing on the mood”.
He added: “Uncertainty has increased.”
However, commentators are still quick to point out the difference between a cool down and another recession.
Uwe Burkert of LBBW bank said: “The modest fall reaffirms our narrative of an economy slowing to a normal growth level.
“This is however no downturn and certainly no recession.”
Joerg Kraemer, chief economist at Commerzbank, told Bloomberg the increased risk of a trade war and weaker business sentiment suggests “not only a short dip in growth, but an intermediate downswing that should last until the end of this year”.
The German economy is heavily reliant on exporting both China and the US and has found itself punished twice over – firstly from President Trump’s tariffs on steel and aluminium coming into the US, and then again from the huge tariffs applied by China on German cars built in Trump-loyal US states heading into the Asian state.
Last week the the IFO slashed its growth forecast for the German economy to 1.8 percent this year and in 2019, a big revision downwards from previous forecasts of 2.6 percent and 2.1 percent respectively.
IFO economist Timo Wollmershaeuser said: “The economy developed significantly more weakly than anticipated in the first few months of the year.
“The global economic risks have risen significantly.”
The significant climbdown comes just one week after the European Central Bank slashed its forecast for eurozone economic growth from 2.4 to 2.1 percent, while the German Bundesbank cut its prediction for the same period from 2.5 to two percent.
Despite battling President Trump’s tariffs, stagnant Brexit negotiations, the rise of a eurosceptic government in Italy and a migration crisis in her own coalition, ING Diba economist Carsten Brzeski has warned “never count out Germany.”
He said: “Hope dies last, even if it takes until the very last second,” likening the Germany economy to the underperforming national soccer team’s last-minute victory in Saturday’s World Cup match against Sweden.”
However, Mr Brzeski warned although Germany could weather existing US tariffs on aluminium and steel, and “even significant US import tariffs on cars”, should the migration row cause Angela Merkel’s government to collapse and trigger a snap election, more serious economic damage was likely.
He said: “For the economy, this would mean further delays of the urgently needed investments, new structural reforms and strengthening of the European monetary union.”