BERLIN (Reuters) - German business morale fell by more than expected in November as the country’s exporters get caught up in a trade dispute between China and the United States.
Economists expressed concern about the drop in the Ifo economic institute’s business climate index, which followed the first quarterly contraction in German GDP since 2015.
Munich-based Ifo said on Monday the index fell for the third month in a row to 102.0. This was lower than a consensus forecast of 102.3 in a Reuters poll of economists.
“Sentiment among German businesses weakened further this month,” said Ifo chief Clemens Fuest. “Companies scaled back their assessments of the current business situation albeit from a high level. Their business expectations also clouded over.”
He added that the economy would grow by 0.3 percent in the fourth quarter at most after contracting by 0.2 percent in the July-September period.
Reciprocal tariffs on goods imposed by the world’s two largest economies are hurting German companies that manufacture in both countries and export in both directions across the Pacific.
The tariffs are not only dampening the business outlook but are starting to leave their mark on the German economy, which has long depended on exports for growth.
Data last week showed that weaker exports were the main reason for the quarter-on-quarter contraction in July-September, and economists said there are clear signs that overall German growth was slowing.
In addition to trade tensions, the German economy is also feeling the effects of slowing growth in the euro zone.
“The index’s fall is somewhat alarming,” Uwe Burkert of LBBW wrote in a note. “It was generally expected that the economic weakness of the third quarter would be corrected with a firmly positive growth figure in the fourth quarter.”
Detailed July-September GDP data on Friday showed exports fell 0.9 percent on the quarter while imports rose 1.3 percent, with net trade knocking a full percentage point off growth. This translated into a third quarter contraction of 0.2 percent.
The third-quarter GDP contraction was mainly due to weakness in the car industry as it struggled to adjust to new emission testing requirements.
While that problem should not affect the fourth quarter, the industry remains vulnerable to trade disruptions as a result of threatened U.S. tariffs on cars manufactured in the European Union and Britain’s planned exit from the bloc.
Andreas Scheuerle of DekaBank pointed to factors also including the Italian government’s row with the European Commission over its expansionary 2019 budget.
“There is the threat of a trade escalation between the U.S. and China and possibly between the U.S. and the EU and there is the threat of a budget dispute with Italy as well as Brexit,” he said. “No wonder firms are cautious looking forward.”
Most economists expect the German economy to cool rather than enter a recession. In its ninth year of growth, it has been increasingly relying on consumption supported by low interest rates, rising wages and a robust labor market.
Those factors are expected to support growth next year while modest tax cuts and spending increases planned by the government should also help offset some of the effects of weaker trade.
“The fall in oil prices looks set to support consumer spending, particularly against a backdrop of low unemployment and rising wage growth,” Jennifer McKeown of Capital Economics wrote in a note. “But the improvement will be tempered by a continued slowdown in global demand.”
Writing by Joseph Nasr; Editing by Paul Carrel, Matthew Mpoke Bigg and David Stamp