Germany’s business sentiment fell in September, raising doubts over recovery despite fiscal stimulus. Execution delays, labour shortages, and sector bottlenecks risk dragging on growth. Meanwhile, European stocks trail Wall Street as investor focus shifts.
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Germany’s economic outlook darkened in September as business sentiment fell more than expected, renewing doubts about the pace of recovery in Europe's largest economy and prompting experts to question the viability of Berlin’s massive fiscal push.
The pullback coincides with an ongoing shift in global investor preferences, as European equities lose ground to a resurgent Wall Street.
Business confidence drops
The ifo Business Climate Index, a key barometer of corporate sentiment in Germany, dropped to 87.7 in September from 88.9 in August — breaking a six-month streak of improvement and falling short of economist expectations of a rise to 89.3.
The decline reflects increasing pessimism among German companies, who reported lower satisfaction with current activity and gloomier expectations for the months ahead.
"Prospects for an economic recovery have suffered a setback," noted Clemens Fuest, president of the ifo Institute, as weakness spread across most sectors.
Manufacturers cited another drop in new orders, while the service sector saw sentiment slide to its lowest since February, dragged down by sharp deterioration in transport and logistics.
Trade saw mixed signals, with retailers slightly more optimistic but wholesalers turning more negative. Only construction showed resilience, posting modest gains in both current assessments and future outlook.
German stimulus plans may underwhelm, warns Oxford Economics
According to Oliver Rakau, chief Germany economist at Oxford Economics, the scale and structure of the German fiscal stimulus may struggle to deliver a timely boost to growth.
“The German government has initiated an ambitious fiscal easing. But its investment-heavy nature, large scale, and focus on sectors already at capacity amid a tight labour market make delays likely,” Rakau said.
Past data shows Berlin has repeatedly fallen short of its investment targets. A 10% shortfall in executing the current infrastructure and defence plans could shave 0.4 percentage points off next year’s GDP growth, Rakau warned.
Although some spare capacity exists in construction — a legacy of earlier policy tightening — bottlenecks remain widespread, particularly in defence-related sectors, which have been booming for years.
Slow planning processes and limited flexibility in scaling up production could mean much of the spending is delayed or funnelled into imports, dampening its immediate impact on domestic output.
Labour shortages are another major constraint. Germany’s unemployment rate remains among the lowest in Europe, and despite a drop in capacity utilisation, employers continue to report persistent shortages of skilled labour. Attracting enough qualified foreign workers to ease the crunch is proving difficult.
“We aren’t convinced that the government's measures to ease bottlenecks will bear fruit quickly enough,” Rakau added. “This is one reason we see below-consensus GDP growth in 2026, though we remain more optimistic for 2027 as stimulus measures gradually gain traction.”
European stocks slip as Powell signals caution
The weak German data added to a broader pullback in European markets, already on edge after Federal Reserve Chair Jerome Powell warned on Tuesday that rate cuts are not a given in the US, citing ongoing risks around inflation and labour market imbalances.
Powell also added that equity markets are "fairly highly valued" raising, some concerns among investors.
On Wednesday, the EURO STOXX 50 slipped 0.3%, mirroring a drop seen in the broader EURO STOXX 600.
Italy’s FTSE MIB, weighed down by bank stocks, led declines with a 1.3% drop, while France’s CAC 40 fell 0.4% and the German DAX edged 0.2% lower.
Among individual blue-chip names, Essilor, L’Oréal, and Mercedes-Benz each dropped about 1.6%, while Carrefour and Rheinmetall bucked the trend with gains of 2.2%.
The euro weakened to $1.1770, on track to notch its fifth loss in seven sessions, while German Bund yields held steady at 2.74%. The spread between French OATs and Bunds remained elevated at 80 basis points, near monthly highs.
Wall Street reclaims the spotlight
After leading American markets for much of the first half of 2025, European equities are now underperforming relative to Wall Street.
The EURO STOXX 600 is flat for September and posted minimal gains of 0.7% and 0.8% in July and August, respectively.
Meanwhile, the S&P 500 is up 8% over the past three months, with September alone poised for a 3% gain — the strongest showing for the month since 2010.
Investor enthusiasm for AI innovation, strong tech earnings, and the possibility of looser Fed policy continues to power US equities.
The combined market capitalisation of the “Magnificent Seven” tech giants — Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia — now exceeds $21 trillion (€18tn), surpassing the entire GDP of the eurozone.
With fiscal stimulus in Germany facing execution risks and the eurozone’s economic momentum faltering, global capital is once again rotating back towards the perceived growth of the United States.
According to the latest data from the US Treasury Department, foreign investors bought a net of $1.7tn (€1.5tn) in US stocks and bonds over the past year through July 2025.
So far in 2025, net foreign purchases of American assets have totalled $743.2 billion (€631.83bn) — more than triple the $214.5bn recorded in the same period last year. That's also significantly above the $555.4bn seen in the first seven months of 2023.
