Gloom settles in over Germany’s economy as businesses remain downbeat about coming months

FRANKFURT, Germany (AP) — Germany’s businesses remain mired in pessimism, a key survey showed Friday, as Europe’s largest economy struggles with shortages of skilled labor, slower global trade, high interest rates and political squabbling.

The closely watched Ifo institute survey of business sentiment rose only slightly to 85.5 points in February from 85.2 points in January due to “slightly less pessimistic expectations,” the institute said in an accompanying statement.

“The German economy is stabilizing at a low level,” the institute said.

The survey results follow a sharp downgrade of the government’s expectations for growth this year, to only 0.2%, from 1.3% in the previous forecast. Germany’s economy shrank 0.3% in 2023, the worst performance by a major economy and a reversal of years of economic success as an export champion.

Germany faces a combination of temporary and long-term headwinds. A burst of inflation after Russia cut off natural gas supplies over the war in Ukraine robbed consumers of spending power. While inflation has since eased and wages are starting to catch up, slowing global trade has held back an economy that is heavily dependent on exports. High interest rates from the European Central Bank — aimed at squelching inflation — have held back credit-sensitive business areas like construction of new apartments and offices.

Meanwhile companies say they can’t find enough skilled labor and have to spend time and money on extensive approvals processes and bureaucracy. Over the longer term, the government skimped on investing in infrastructure such as rail networks and high-speed internet in order to balance budgets.

A 2009 constitutional amendment limiting deficit spending has come back to haunt the current government, which had to revise its spending for this year at the last minute after the country’s constitutional court rejected its practice of putting additional spending in special emergency funds.

A relatively modest package of tax breaks for business proposed by Chancellor Olaf Scholz’s coalition government is stalled in the upper house of the legislature. It is being blocked by the conservative opposition party, which demands restoration of a subsidy on diesel fuel for farmers. The cancellation of the subsidy has led to farmers blocking roads with their tractors.

The economy shrank 0.3% in the last three months of 2023, official figures confirmed Friday, and economists are forecasting another shrinkage in the current quarter.

Friday’s Ifo release “gives very little hope of an imminent rebound,” said Carsten Brzeski, global head of macro at ING bank.