German business confidence heads downhill after 6-month rise

BERLIN (AP) — German business confidence has dropped for the first time after a six-month rise as inflation recedes only slowly in Europe's biggest economy and interest rates continue to increase, a closely watched survey showed Wednesday.

The Ifo institute said its monthly index dropped to 91.7 points in May from 93.4 last month. The index had risen every month since November. Managers' outlook for the next six months declined significantly, while their assessment of both their current situation was slightly worse than in April.

There was a sharp decline of confidence in the manufacturing sector, where expectations saw their largest increase since March 2022, the month after Russia launched its war in Ukraine, Ifo said.

The German economy stagnated in this year's first quarter after contracting by 0.5% in the final three months of 2022, according to preliminary figures released earlier this month.

Germany's annual inflation rate stood at 7.2% in April, down from 7.4% in March. The European Central Bank has repeatedly hiked interest rates in an effort to inflation across the 20-nation eurozone to the bank’s target of 2% — something that creates its own challenges for businesses and consumers.

“The root cause for the deteriorating business climate at present is the stickiness of core inflation and the resulting additional tightening of monetary policy by the ECB," Timo Klein, principal economist with S&P Global Market Intelligence in Frankfurt, wrote in a research note.

He said that “the stability of the service sector is the only factor preventing a recession right now.”

Ifo's survey is based on response from about 9,000 managers across various business sectors.