“Sentiment in the German economy has collapsed,” Ifo President Clemens Fuest proclaimed on Friday.
The color accompanying the March read on Germany’s most important leading indicator was… well, colorful. The headline index “nosedived,” Ifo said.
I suppose the bombast was apt. Confidence is now the lowest since January 2021 and near levels seen in the aftermath of the initial European COVID outbreak (figure below).
“Companies in Germany are expecting tough times,” the survey said, stating the obvious.
You’ll note in the figure (above) that the drop in the expectations gauge appears anomalous, even considering the circumstances. Unfortunately, that’s not a misprint.
The expectations index dropped 13.3 points from February (figure below), the largest decline on record including the drop seen at the onset of the pandemic.
Fuest described the dramatic decline as indicative of “pronounced pessimism.” Firms are now “extremely uncertain” about the near-term outlook, which is “particularly bleak in the logistics industry,” the survey noted.
There was no ambiguity when it came to ascribing causation. “War in Ukraine causes business climate index to plummet,” read the Ifo’s own headline.
Germany is, of course, on the front lines of the economic war with Russia. We can only hope it doesn’t end up similarly positioned in the shooting war.
The country’s dependence on Russian gas has now been exposed for the perilous liability anyone with a shred of common sense always knew it was. Now, Olaf Scholz is rushing to fix the situation. Germany plans to cut imports of Russian gas near zero within two years, and may halve oil imports from Russia within months, according to the Economy Ministry.
Inflation is running at multi-decade highs, and the country still hasn’t shaken COVID (not that anyone else has either). Consumer prices rose 5.5% YoY in February (figure below), reaccelerating after a slight moderation in the pace of price gains the prior month.
The longer the war lasts and the longer it takes Europe to diversify its energy imports, the more persistent price pressures will be. “The effects of the pandemic are increasingly superimposed by uncertainties related to the Russian attack on Ukraine,” the Federal Statistical Office remarked earlier this month, commenting on the likely persistence of elevated prices.
“While a month ago, economic prospects for Germany looked bright and a strong rebound was in the making, stagflation has now become the most likely scenario,” ING’s Global Head of Macro, Carsten Brzeski, said Friday. “German businesses seem to be realizing that the war is more of a game-changer for the German economy than COVID has ever been.”
War and pestilence. And here I thought we’d made progress as a species.
Europe is not just about energy, it is also about food. If the Russian invasion continues, as it surely will, there will be a significant reduction in spring planting and a lot less food for Russia and Europe. Someone asked in the comments for an earlier article, how long with the Russians put up with Putin. If they are standing in Soviet style bread lines this coming fall they will be pretty upset. Remember, there’s no Miami in Russia. Siberia is unpleasant at its best.