German Business Confidence Slumps as Virus Threatens Rebound

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German business confidence took another hit in November, with a new wave of Covid-19 infections looming over the economy and rising inflationary pressures threatening to weigh on manufacturing.

A gauge compiled by the Munich-based Ifo Institute dropped for a fifth straight month to its lowest since April. Economists had predicted a decline to 96.7. Expectations for the next half year also worsened.

The report underscores mounting challenges facing German businesses, which are now facing a resurgent pandemic -- having already struggled with supply disruptions for most of 2021 as demand across the globe rebounds following lockdowns.

A separate purchasing managers’ index Tuesday showed “unprecedented inflationary pressures” are threatening to restrain output in the coming months.

The Bundesbank warned this week that inflation may approach 6% in November, and could stay elevated for a longer period than originally thought. In addition, new pandemic restrictions risk weighing on demand for services, which has been an important driver of the recovery amid the manufacturing headaches. 

“Bottlenecks continue to be a problem and on top of that we now have these very serious Covid outbreaks,” Ifo President Clemens Fuest told Bloomberg Television’s Francine Lacqua. “We see very clearly in the data that this is worrying companies as well. Services and services expectations are falling very quickly, in particular in hospitality and tourism.”

The business-confidence report comes as Olaf Scholz sealed a coalition deal to become Germany’s next chancellor after forging an unprecedented alliance that aims to revamp Europe’s largest economy by tackling climate change and promoting digital technologies. 

In addition to tackling the recent surge in Covid cases, “the coalition needs to address the more long-term challenges,” Fuest said. “Energy policy, guiding the economy toward medium term growth, so it’s a big job.”

The Ifo numbers also arrive just weeks before European Central Bank officials gather to determine how to wind down extraordinary pandemic stimulus. Several policy makers, including German Isabel Schnabel, have warned that there are upside risks to inflation and that monetary policy must be able to react quickly to changes in the outlook.

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