Germany's proud manufacturing sector is now in trouble, with confidence deteriorating for four consecutive months in October amid a triple blow of supply bottlenecks, rising energy prices and rising infection rates. The Bundesbank issued a grim outlook, saying economic growth could slow sharply in the fourth quarter, with stagflation risks remaining high.
The Business Climate Index, published by the Ifo Institute for Economic Research in Germany, is germany's best short-term indicator, based on statistics on around 9,000 monthly surveys of companies in the manufacturing, service, construction, wholesale and retail sectors. In the latest report, the lowest index since April appeared, indicating that business confidence fell to a low.
The main reason for the low business confidence is that the production capacity of the manufacturing industry is completely unusable. Germany's manufacturing and export-oriented economy have been hit hard by shortages of parts and raw materials, and half of industrial companies are now planning to raise prices. Bottlenecks in intermediate products and raw materials have also spread from manufacturing to other sectors of the economy, such as retail.
The COVID-19 crisis has turned into a scarcity crisis, and there may be a risk of stagflation in the fourth quarter that is feared. Ifo estimates supply issues will slow growth to about 0.5 percent in the fourth quarter. The Bundesbank also expects full-year growth to be significantly lower than the 3.7% forecast made in June. In addition to supply problems, rising natural gas and energy prices have also made it more difficult to recover. In addition, the rising rate of infection in Germany may lead to the re-imposition of restrictions on retailers, bars and restaurants in the winter.
Germany's major economic institutions have cut their growth forecasts for this year from 3.7 percent to 2.4 percent, with the biggest obstacle coming from the automotive industry, where the shortage of semiconductor parts has forced automakers to cut production and unusually high natural gas prices have forced major chemical companies to cut production of ammonia, a key ingredient in fertilizers. There are also a variety of raw materials including magnesium prices have risen sharply, which has worried German companies.
In addition, the report said that including services, sports and entertainment businesses, people's consumption enthusiasm is still not high, the government still has a number of restrictions, coupled with the low vaccination rate, many industries can not be normalized this year. At the same time, consumers are expected to face the highest inflation than in recent years, with consumer prices expected to rise 3 percent this year and 2.5 percent in 2022.
ING expects the risk of stagnation in Germany in the fourth quarter to be high, and the enthusiasm for growth in the summer months has completely dissipated. Due to slower economic growth, the ECB is expected to continue to provide supportive interest rates and a generous quantitative easing environment, with a low probability of raising interest rates at the end of 2022 and should not be possible until 2024.
However, ING believes that the future is not pessimistic, because the factors that support solid economic growth, such as abundant orders, low inventories in manufacturing, strong labor markets and excess savings by consumers, still exist. With the adverse effects of the epidemic and the gradual overcoming of supply bottlenecks, German economists expect the economy to return to normal capacity utilization in 2022, raising the growth forecast for 2022 from 3.9% to 4.8%.