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German companies cut investment plans as economic gloom deepens

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German companies have slashed their investment plans for this year and next, adding to the challenges plaguing Europe’s largest economy.

In a benchmark survey published on Monday based on responses from 5,000 businesses, the Ifo Institute in Munich said it found they had “significantly reduced their investment plans”. 

The institute’s index of net investment plans fell from 14.7 in March, when it carried out its last survey, to 2.2 in the poll carried out in the first three weeks of November. For next year, the index, which measures the difference between the percentage of companies planning to increase investments and those planning to cut them, fell even lower to 1.2.

“The investment climate has deteriorated noticeably,” said Lara Zarges at Ifo. “This is the result of increased financing costs, weak demand and economic policy uncertainty.” 

Line chart of  showing German companies have cut their investment plans

The findings came only weeks after a German constitutional court ruling left the government with a €60bn hole in its budget, complicating the ability for Berlin to provide companies with state support next year.

Chancellor Olaf Scholz’s government is still trying to agree a new budget for 2024. It said last week that the court ruling would force it to wind down its €200bn Economic Stabilisation Fund, which has been subsidising electricity and gas prices for households and businesses, rather than rolling over the funds into next year.

The court’s decision was announced on November 15, in the middle of the Ifo survey. Zarges said she had been surprised that companies responding after the ruling were “slightly more optimistic” on investment than those that responded before it. But she said this showed that this year’s investments are unlikely to be affected by the budget upheaval.

She said extra pressure on government spending was likely to have more of an impact on companies’ investment plans for 2024 and predicted this could show up in next March’s survey “depending on how the budget turmoil will develop”.

The largest cut in investment plans was found in the manufacturing sector, where the investment index has dropped from 21.4 in March to 6.8 in the latest study.

Within this sector, there were even bigger falls noted among the most energy-intensive industrial groups, such as chemical producers, suggesting they would sharply reduce capital expenditure this year.

German industrial energy prices are double those in the US and China, according to a recent study by research group Prognos for the Bavarian employers’ association VBW.

Retailers also signalled heavy cuts to their investment plans, which have turned negative for this year and next, Ifo said. However, automotive manufacturers said they aimed to maintain their investment at a high level.

Carsten Brzeski, head of global macro research at Dutch bank ING, said the recent court ruling had caused “self-inflicted damage to the German economy”, adding that it “will weigh strongly not only on investments but also on consumption”. It prompted him to slash his forecast for German gross domestic product to shrink 0.4 per cent next year.

Line chart of Gross fixed capital formation (% of GDP) showing German investment has rebounded in recent years

German investment has rebounded in recent years, according to figures from the World Bank showing gross fixed capital formation as a share of GDP has risen from a low of 19 per cent in 2009 to 23 per cent last year — catching up with the EU average.

However, a growing number of German companies plan to shift parts of their activities abroad, particularly energy-intensive manufacturers, according to a recent study by consultancy Deloitte and the business lobby group BDI.

Last month’s survey of 100 German companies with turnover of more than €50mn each found a third were planning or considering relocating parts of their value chain out of their home country. Almost 60 per cent said the security and cost of energy was the main reason to move activities overseas.

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