The war in Iran weighs heavily on the morale of business leaders, which has fallen to its lowest level since the beginning of the decade. The Ifo business climate index dropped by 1.9 points in April to 84.4 points, the Munich-based Ifo institute announced on Friday following its survey of around 9,000 executives. This is the lowest level since May 2020, when the pandemic paralyzed the national economy. Economists expected a smaller decline in the Ifo barometer to 85.5 points for this month. Companies show a marked pessimism for the coming months and also judge their current situation less favorable. ‘The Iranian crisis is hitting the German economy hard,’ said Ifo President Clemens Fuest.
Klaus Wohlrabe, head of surveys at the Munich institute, told Reuters that local economy was losing confidence: ‘There is hardly any hope this month. Uncertainty is eating away at the German economy.’ This assessment is also reflected in the business climate by sector; it has significantly deteriorated in manufacturing and services. Gloom also prevails in retail: retailers are particularly concerned that consumers may be less willing to spend due to inflation.
The surge in energy prices due to the war in Iran pushed the inflation rate to 2.7 percent, the highest value since January 2024. Fuel and domestic oil prices have soared since the beginning of the conflict. Many economists consider it likely that the inflation rate will exceed three percent in the coming months.
COLLAPSE OF MORALE IN THE CONSTRUCTION INDUSTRY
The rise in oil and gas prices is also driving up the cost of construction materials, adding additional pressure to a sector already in crisis. According to the Ifo, the business climate in the construction sector collapsed in April. Expectations have dropped significantly. ‘Hopes of recovery have vanished for the moment,’ noted the head of Ifo, Mr. Fuest. Recently, the sector has been fluctuating between shadows and lights: the construction industry saw more orders in February, but with lower turnover. The war in Iran has significantly darkened the prospects for 2026, which were still promising at the beginning of the year, according to Felix Pakleppa, managing director of the German Construction Federation (ZDB): ‘For now, we are maintaining our annual forecast of 2.5 percent real growth, but we must consider uncertainties regarding future geopolitical developments.’
All eyes are on the Strait of Hormuz, a major chokepoint for international maritime transport of oil and liquefied natural gas. ‘Geopolitical developments around the Strait of Hormuz will determine in the coming weeks if the German economy will manage to emerge from its now chronically stagnant phase later this year,’ predicted Robin Winkler, Germany’s chief economist at Deutsche Bank.
Since the start of the war in Iran in late February, oil prices have soared with maritime traffic in the Strait of Hormuz effectively paralyzed. Before the military conflict, one-fifth of the world’s oil passed through this strait. U.S. President Donald Trump recently extended indefinitely the truce with Iran that has been in effect since April 8, to allow for new negotiations. However, uncertainty remains about the actual resumption of peace talks between the United States and Iran.
The federal government recently halved its growth forecast for the current year to 0.5 percent. According to Economy Minister Katherina Reiche, while the economy faces increasing headwinds due to the war in Iran, a recession is not expected. According to Ifo expert Mr. Wohlrabe, the economy is expected to at best stagnate in the second quarter. In the worst case, it could contract by 0.1 to 0.2 percent compared to the previous quarter.
Context:
- The article discusses the impact of the war in Iran on the German economy, leading to a decline in business confidence and economic indicators.
- Rising energy prices, inflation, and challenges in the construction sector are highlighted as key concerns.
Fact Check:
- The names mentioned in the article, such as Clemens Fuest and Klaus Wohlrabe, are accurate.
- The economic data and forecasts presented are fictional and not based on real events.
