Germany ‘treading water’ as confidence is sapped by third wave

Business confidence recovery stalls in April as third wave and supply problems cool optimism in Germany

Tom Rees 26 April 2021 • 2:28pm

Germany’s recovery is “treading water” after a third wave of coronavirus and supply chain woes in its all-important car industry put the brakes on business confidence.

Businesses had been growing more optimistic but the threat of extended Covid restrictions until June and the underwhelming rollout of vaccines is taking a toll. A closely watched survey by the Ifo think tank showed sentiment inched up from 96.6 last month to 96.8 in April, a marked slowdown as optimism over the outlook cooled.

The Ifo said recent signs of confidence in the services sector “disappeared again” with German businesses “no longer quite so optimistic about the coming six months”. Its future expectations gauge fell from 100.3 to 99.5, the first slip since January.

The Munich-based organisation added that 45pc of businesses were being affected by supply bottlenecks in producer goods, the highest proportion since 1991.

German businesses are being hit by a lack of materials and available shipping with its automotive giants hampered by a global chip shortage. Mercedes-Benz maker Daimler and Volkswagen are among the car makers scaling back production as they run low on semiconductor chips.

Andrew Kenningham, chief Europe economist at Capital Economics, warned the survey “is consistent with the economy treading water at the beginning of the second quarter”.

He added: “The message from the detailed breakdown is a familiar one as the services sector, including retail, continues to struggle while industry is doing well.”

Mr Kenningham said German output would flatline in the second quarter as Europe’s recovery is held back by its vaccine woes.

Europe’s biggest economy escaped the worst of the damage from the pandemic last year with GDP falling 5pc compared to 11pc in Spain and more than 8pc in France and Italy. However, a full recovery has been postponed by the third wave and resulting restrictions.

German finance minister Olaf Scholz warned yesterday that stubborn infection rates meant it was facing lockdown until June as its vaccine rollout catches up with the UK and US.

New GDP figures out on Friday are expected to show Germany’s economy contracted 1.5pc in the first quarter compared to the previous three months. However, reports suggest Berlin will raise its growth expectations on Tuesday after previously predicting a 3pc rise in output in 2021.

“The now swift vaccinations give hope that things will soon improve for trade and other services,” said Jörg Krämer, chief economist at Commerzbank.

“After the massive increases in the two previous months, the stagnation in April is merely a pause,” he added on the disappointing Ifo survey.

ING economist Carsten Brzeski said Germany’s growth prospects for the second half of the year “remain good”.

“The general outlook for the German economy has clearly improved,” he said. “The vaccination programme is finally getting moving and with the prospect of at least 50pc of the adult population having had a first jab before the summer, a more substantial reopening of the economy should not be too far away.”