Supply headaches sink German business morale to six-month low

Troubled by supply chain woes, German firms diversify and relocate - DIHK
Troubled by supply chain woes, German firms diversify and relocate - DIHK Copyright Thomson Reuters 2021
By Reuters
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By Michael Nienaber and Balazs Koranyi

BERLIN/FRANKFURT -German business morale deteriorated for the fourth month running in October as supply bottlenecks in manufacturing, a spike in energy prices and rising COVID-19 infections are slowing the pace of recovery in Europe’s largest economy from the pandemic.

The Ifo institute said on Monday that its business climate index fell to 97.7 from an upwardly revised 98.9 in September. This was the lowest reading since April and undershot the 97.9 consensus forecast in a Reuters poll.

The weaker-than-expected business sentiment survey was followed by a grim outlook from Germany’s central bank, which said in its monthly report that economic growth was likely to slow sharply in the fourth quarter.

The Bundesbank added that full-year growth was now likely to be “significantly” below its 3.7% prediction made in June.

“Supply problems are giving businesses headaches,” Ifo President Clemens Fuest said, adding that capacity utilisation in manufacturing was falling.

“Sand in the wheels of the German economy is hampering recovery.”

Half of all industrial companies are planning to hike prices due to the continuing supply problems, which is a record high in the survey, Ifo economist Klaus Wohlrabe said.

The bottlenecks for intermediate goods and raw materials are spilling over from manufacturing to other sectors of the economy too, such as retailing, meaning not every Christmas present will be available for delivery in time, Wohlrabe added.

The supply problems would slow down growth to roughly 0.5% in the fourth quarter, Wohlrabe said.

The German economy expanded by 1.6% quarter-on-quarter in the three months from April to June.

The Federal Statistics Office will publish a flash estimate for GDP growth in the third quarter on Friday. Analysts predict a quarterly expansion of 2.2% from July to September.

The government on Wednesday is likely to slash its forecast for economic growth this year, after leading institutes cut their joint forecast to 2.4% from 3.7% last week. For 2022, the institutes predict 4.8% growth.

“The coronavirus crisis has turned into a scarcity crisis,” VP Bank economist Thomas Gitzel said.

In addition to the supply problems, the spike in gas and energy prices is complicating the recovery, Gitzel added.

Other analysts pointed to rising COVID-19 infections in Germany, which could lead to renewed restrictions for retailers, bars and restaurants over the winter months.

Commerzbank economist Joerg Kraemer said companies were expecting politicians to react to the latest increase in coronavirus infections with new restrictions.

In addition, the current coronavirus wave is leading to factory closures, especially in Asia, which will exacerbate the material shortages in Germany, Kraemer added.

“The German economy is unlikely to grow much in the fourth quarter. Stagflation is on the horizon for this quarter at least,” he said.

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