Sentiment among German companies fell more than anticipated in June, the first fall since last December. The service sector improved but the trade sector worsened. Euro 2024 is expected to bring additional revenue but will not significantly affect the economy.
ADVERTISEMENTSentiment among German companies declined more than anticipated in June, marking the first month-over-month drop since December 2023, the ifo Institute has reported.
The monthly survey of around 9,000 German firms in manufacturing, services, trade, and construction revealed that the ifo Business Climate Index fell from 89.3 points in May to 88.6 in June, missing economists' expectations of a rise to 89.7.
The overall confidence decline was primarily driven by worsening business expectations for the next six months. The expectations gauge fell from 90.4 in May to 89 in June, falling short of the predicted 91. The index for current conditions remained steady at 88.3, marginally missing the expected 88.5.
In manufacturing, the business climate fell after three consecutive months of improvement, with companies becoming more cautious about the future.
In the service sector, the index increased. Service providers evaluated their situation more positively, and the outlook for the second half of the year also continued to improve.
In trade, the business climate worsened significantly due to growing skepticism about the future. In contrast, the construction sector saw a slight rise in its index, driven by less pessimistic expectations, although a lack of orders continues to be a major issue.
"The German economy is having difficulty overcoming stagnation," the ifo wrote.
Germany's economic outlook slightly improved
Last week, the ifo Institute modestly increased its economic growth forecast for Germany in the second half of 2024.
For the full year 2024, the German economic research institute anticipates a 0.4% growth, an improvement from the 0.2% contraction in 2023. This represents a 0.2 percentage point increase from the ifo's spring 2024 forecast. Meanwhile, Germany's economy is projected to grow by 1.5% in 2025, consistent with previous estimates.
Inflation is seen averaging 2.2% in 2024 and to fall to 1.7% in 2025.
According to the Munich-based research institution, manufacturing with its export business is bolstering the economy, while construction will probably continue its downward trend and suffer a strong setback.
"New hope is currently emerging. The German economy is slowly working its way out of the crisis," said the ifo's head of forecasts, Professor Timo Wollmershäuser.
Euro 2024 not expected to be a game changer
"The European Football Championship being held in Germany will not bring about a summer fairytale for the German economy," the ifo wrote in a study published earlier this month.
Euro 2024 is projected to bring Germany revenues from foreign football tourists. According to the latest ifo economic forecast, this influx corresponds to about 0.1% of economic output in the second quarter of the year.
However, the ifo institute assessed that, from a macroeconomic perspective, this type of major event generally has a limited impact, except in tourism.
"Although domestic consumers will also briefly spend more in the hospitality and food retail sectors during the Championship, they will reduce their spending elsewhere, so that private consumption as a whole will likely remain unaffected. That is at least what experience from the 2006 World Cup suggests," professor Wollmershäuser said.
Ifo researcher Gerome Wolf pointed out. "However, the effect will only be short-lived, meaning that service exports due to tourists returning home after the end of the Euro 2024 are likely to fall again in the third quarter and, on balance, remain the same."
Market reactions
German assets showed minimal reaction to the ifo business climate release.
ADVERTISEMENTBund yields held steady at 2.40% during Monday morning's relatively tight trading session.
The DAX index climbed 0.7% by 10:30 a.m. CET, rebounding from Friday's 0.5% decline, led by gains in the car manufacturing sector. Porsche AG, BMW, Volkswagen, and Mercedes-Benz AG rose by 3.2%, 3%, 2.2%, and 1.8%, respectively.
Among other top performers, Puma and Fresenius Medical Care increased by 2.1% and 2.4%, respectively.
