The fresh blow to business confidence is partly due to the weak reopening of the Chinese economy. According to the leading economic research institute Ifo, a possible recession in the United States and the continued increase in interest rates in the euro area will only further depress sentiment among German companies.
Lowest level since December
The German business sentiment index for industry and trade fell from 91.5 to 88.5 in June. This is the lowest level since December last year. The sub-index, which reflects the mood of German entrepreneurs on the current situation, fell to 93.7 from 94.8 the previous month. Companies were also less optimistic about the future. For example, the index measuring expectations for the future fell to 83.6 from 88.3 in May.
Weakness
“Weakness in manufacturing in particular is sending the German economy into turbulent waters,” said Ifo president Clemens Fuest. It emerged last week that activity in the euro area’s largest economy contracted much more sharply than expected this month. German industry contracted again and growth in the services sector also slowed more than expected.
The sharp decline in the Ifo index suggests, according to ING economist Carsten Brzeski, that the recovery of the German economy is “over before it has even begun”. The ING economist sees the optimism of the Netherlands’ most important trading partner fading and worries about economic growth rising. “The feeling that Germany is heading for a long period of subdued growth seems to have reached the German business community.” Brzeski doesn’t think the German economy will remain stuck in recession for years to come, but he expects growth to remain subdued at best due to short- and long-term challenges.
Skilled workers
According to the German state investment bank KfW, the shortage of skilled workers will be one of the biggest obstacles to the growth of the German economy. One study shows that 42 percent of companies surveyed struggle with this.
“The recovery of the German economy ended before it really started”
These include tax advisers and legal staff, but there are also shortages of technicians and engineers in German industry. There are shortages, especially in eastern Germany. In the southwest of the country, the situation is less serious, according to KfW. Larger companies, in particular, would be hit harder than smaller companies.
The researchers say that the shortage of skilled personnel has temporarily eased due to the cooling of the economy due to the war in Ukraine and high inflation. But the deficit will widen again as the German economy is expected to recover later this year. KfW says shortages need to be addressed by bringing in skilled workers from abroad, increasing worker productivity and putting more Germans to work.
Germany is grappling with a strong aging of the population, which further exacerbates the tension on the labor market. The German government has announced measures to make it easier for skilled foreigners to come to work in the country.
Minimum wage on the rise, unions angry
The German minimum wage will rise by 41 cents an hour next year to 12.41 euros. This was decided by the Commission on the minimum wage of the country. From 2025, a further 41 cents will be added, at 12.82 euros per hour. Unions believe the increases are insufficient at a time of high inflation.
The first increase, effective January 1, amounts to an increase of 3.4 percent. One year later it is 3.3%. That’s less than this year’s inflation. The unions therefore believe that this year’s increase, in particular, corresponds to a “huge wage cut” for the approximately 6 million Germans who earn the minimum wage.
In the minimum wage committee, the unions had pledged to raise the lowest possible hourly wage to 13.50 euros. That would have meant a 12.5% increase. But business representatives vehemently objected. President Christiane Schönefeld, a lawyer, also thought that step was too big.
Election promise
Germany only introduced a minimum wage in 2015. It was set at €8.50 at the time, but has since been steadily increased. Normally, the minimum wage committee decides on these increases. But the German government implemented a hike from €10.45 to €12 last year, ignoring the committee. This increase was an important election promise from Chancellor Olaf Scholz.