German Business Sentiment Fell Less Than Expected in March, Ifo Finds

German business sentiment falls, Iran war hits upswing hopes

Impact of Iran War on German Business Morale

By Maria Martinez

BERLIN, March 25 (Reuters) - German business morale fell sharply in March, as the Iran war made companies more pessimistic and threatened the long-awaited recovery of Europe's biggest economy.

Business Climate Index and Economic Outlook

"The war in Iran has, for the time being, ended hopes of an economic upswing," said Clemens Fuest, president of the Ifo institute that on Wednesday said its business climate index fell to 86.4 in March compared with a revised 88.4 in February.

Analysts had forecast it would drop to 86.1.

Expert Opinions on Recovery

"The recovery is stuck in the Strait of Hormuz," said Sebastian Wanke, economist at KfW, adding that with every week that the Iran war continues, business sentiment is depressed further and the economy is held back.

The decline in the headline index was due to significantly more pessimistic expectations, which fell to 86.0 in March from 90.2 in February as uncertainty among companies increased.

Assessments of the current situation, however, remained unchanged at 86.7. 

Risks to Economic Recovery

Potential Consequences of Prolonged Conflict

WAR COULD DERAIL RECOVERY

"If the war and the closure of the Strait of Hormuz were to continue for another one or two months, the economic damage to Germany would be clearly noticeable," said Joerg Kraemer, chief economist at Commerzbank.

Indicators Reflecting Economic Slowdown

In line with the decline in the Ifo index, the Purchasing Managers Index on Tuesday showed Germany's private sector growth slowed to its weakest pace in three months in March as services lost momentum and the Middle East conflict drove freight and energy costs higher.

"The fall in the German Ifo index and the composite PMI in March suggest that the renewed rise in energy prices could derail the tentative recovery in the German economy," said Franziska Palmas, senior Europe economist at Capital Economics.

Sectoral Performance and Future Outlook

While the Ifo business climate index fell across all sectors, the PMIs showed an improvement in manufacturing activity and a deterioration in services.

Palmas said Germany will be more resilient than in 2022 because the rise in energy prices has been much smaller so far and a lot of the least profitable energy-intensive production has already been permanently lost.

"But GDP may still stagnate in the middle of the year," she said, cutting forecasts to 0.5% growth from 0.8% before the conflict started.

(Reporting by Maria Martinez and and Thomas SeythalEditing by Miranda Murray and Alexander Smith)