German Economy Faces Pessimism as Majority of Companies Expect Weaker Business Activity

The hope of slight growth that arose in the spring is gone again: the majority of the German economy is again looking to the future with pessimism. More than every third company expects weaker business activity this year than in the previous year, as the new economic survey by the German Economic Institute (IW) shows.

The prospects for German companies worsened again in the summer: 34 percent of all companies surveyed assume that their production will deteriorate this year, only 27 percent expected an improvement. For comparison: In spring 2023, far fewer companies were pessimistic at 26 percent, but 36 percent were optimistic. The construction industry in particular is struggling with high construction costs, higher interest rates and lower demand. Here the proportion of pessimists clearly predominates. Overall, the IW surveyed over 2,000 companies from all over Germany in June.

Slightly positive mood among service providers

The situation among service providers is visibly better, but still far from good. Almost one in three companies in this sector has positive future production expectations, while 23 percent have negative ones. The reason: The fear of high energy costs has decreased and the employment situation is stable. That encourages consumption. But here, too, the overall mood has deteriorated since the spring.

Businesses in Hesse, Rhineland-Palatinate, Saxony and Thuringia are particularly pessimistic. The latter is hit harder by the economic shock because trade with Eastern Europe has been disrupted. In Baden-Württemberg, the high energy prices are burdening the machine and car manufacturers, and the global economic slump is also slowing down. Major economic problems were initially expected in northern Germany due to the close economic ties with Russia and the Baltic Sea region, but things didn’t get that bad: New local liquid gas terminals and booming domestic tourism are providing some hope amidst the energy crisis.

Energy, purchasing power and interest

There is currently no prospect of an economic upswing. The mix of high production costs, lower purchasing power, high interest rates and a slowing global economy is holding back consumers and companies. “The war in Ukraine and its consequences for the global economy are developing into ongoing burdens for companies and consumers,” says study author and IW economic expert Michael Grömling. These uncertainties are also prolonging the investment backlog that already formed during the pandemic. “That probably won’t change in the foreseeable future. Investments in climate transformation and digitization would be enormously important for the country’s competitiveness,” says Grömling.