German factory executives have reported that industry conditions are in “free fall”, according to a survey that comes just hours before the European Central Bank’s policy decision.
The Ifo Institute’s manufacturing business climate index slumped to minus 4.3 in July from positive 1.3 the previous month. The reading was the lowest in more than nine years and echoes a separate survey released on Wednesday that pointed to mounting troubles in Europe’s powerhouse economy.
The broader Ifo sentiment gauge, which also covers Germany’s services sector, declined as well, hitting the lowest level since 2013.
“In manufacturing, the business climate indicator is in freefall,” said Clemens Fuest, president of the Ifo Institute, a highly regarded research group. “No improvement is expected in the short term, as businesses are looking ahead to the next six months with more pessimism.”
Jörg Krämer, chief economist at Germany’s Commerzbank, said that “there is far and wide nothing to be seen of the second half recovery hoped” after a challenging first half of the year for the country’s economy. “Germany is in a grey area between a marked growth slowdown and a recession,” he said.
The latest batch of weak data added fuel to a broad rally in Europe’s bond market. German, French, Italian and Greek debt all advanced in price on Thursday, sending yields falling. In a sign of the vigour of the rally, the Swiss 50-year bond yield turned negative. That suggests investors who buy that debt and hold it to maturity decades down the line would face a loss.
The European Central Bank is due to release a much-anticipated monetary policy statement on Thursday afternoon. Investors broadly expect policymakers will hint at a reduction in the deposit rate in September. However, the persistent gloom has prompted a handful of analysts to expect a cut as soon as Thursday. Money markets were pricing roughly 40 per cent odds of a July cut.
Expectations have also grown that the ECB will need to unleash a fresh round of bond buying in a bid to shore up the bloc’s economy. Germany, in particular, has sustained a blow since its sprawling manufacturing sector has been affected both by the US-China trade skirmish and also a slowdown in global growth.
“The ECB is very likely to ease its monetary policy considerably, if not as we expect today, then by September at the latest,” said Mr Kramer.
Ifo’s report is based on a poll of roughly 9,000 responses from companies in the manufacturing, service sector, trade and construction industries.
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