Not a "strong growth driver in sight" for Germany amid fiscal woes

(Alliance News) - Whilst business sentiment in Germany improved slightly this month, analysts are still feeling fairly sombre about the country's economic prospects.

The ifo business climate index rose to 87.3 points in November from 86.9 in October. It was the index's third monthly increase in a row, but lagged FXStreet-cited market expectations of 87.5 points.

The current situation index rose to 89.4 points from 89.2, while expectations rose to 85.2 points from 84.8.

"We expect economic weakness to continue in Q4 as industrial production and business climate remain depressed. While today's ifo print indicates that expectations continue to improve, a recovery is not yet in sight as clear growth impulses are still lacking," said Oxford Economics senior economist Alexander Valentin.

According to Destatis on Friday, the German economy contracted by 0.1% on a quarterly basis in July to September, on a price, seasonally and calendar adjusted basis. This was in line with its first estimate.

In the second quarter, gross domestic product had grown by 0.1% from the first, after seeing no growth in the first quarter from the final quarter of 2022.

ING concurred with Oxford Economics, saying the economic reality in Germany "does not look pretty".

"Be it the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy or new uncertainty regarding already-announced fiscal stimulus measures, except for a turn in the inventory cycle, there doesn't seem to be a strong growth driver in sight," the Dutch bank explained.

As ING notes, Germany's fiscal policies have come into focus. The country's finance minister said the government plans to suspend a constitutional debt limit for the fourth year in a row. This follows a shock ruling in Germany's highest court last week, which sparked a budgetary crisis.

The court ruled that Chancellor Olaf Scholz's government had broken the constitutional debt rule by transferring money earmarked for coronavirus pandemic support to a fund to fight climate change. This left a EUR60 billion shortfall in its budget for 2023, and cast doubt over its investment plans.

Suspending the debt limit is likely to place pressure on the coalition between the Social Democrats, Greens and FDP, after a pledge to reapply the constitutional limit, which had been suspended over the pandemic period.

"The big debate is over the 2024 budget, which the government had wanted to conclude by the end of the year, but this is not possible now. Lindner will not agree to another emergency in 2024, which is what the Greens and the SPD are demanding. This would be political suicide for the FDP so we can confidently predict that this won't happen. This, in turn, means that the government would have to make some big savings," ING predicted.

"Subsidies are probably the least painful item to cut. More structurally speaking, the government will have to decide in the coming days and weeks whether it will structurally change the debt brake, by either calling for a multi-year suspension from the start or a reform, finding exemptions for investments, or whether it will try to fill the budgetary holes by expenditure cuts and higher taxes."

The latter option would "clearly push the economy further into a recession", ING maintained.

By Elizabeth Winter, Alliance News deputy news editor

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