German business sentiment hits lowest since 2020 as Iran war weighs

By Maria Martinez

BERLIN, April 24 (Reuters) – German business morale fell more than expected in April, posting the lowest reading since May 2020, as the Iran war threatens the long-awaited recovery of Europe’s biggest economy.

The Ifo Institute said on Friday its business climate index fell to 84.4 in April from 86.3 in March. Analysts polled by Reuters had forecast a slight decline to 85.5.

“The German economy is being hit hard by the Iran crisis,” Ifo Institute President Clemens Fuest said.

Assessments of the current situation fell to 85.4 from 86.7 in the previous month, while expectations declined to 83.3 from 85.9 in March. 

In line with the decline in the Ifo index, the Purchasing Managers’ Index on Thursday showed Germany’s private sector contracted for the first time in almost a year in April.

“We hope the surveys will stabilise in coming months, but at this pace Germany’s economy is being knocked down before it has had a chance to get up,” Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said. 

SENTIMENT ERODED BY THE CONFLICT

“The German economy is losing its confidence,” Klaus Wohlrabe, head of surveys at Ifo, said.

Business morale declined across all sectors, the survey showed.

“With the on-again, off-again nature of the Iran conflict, sentiment continues to suffer significantly,” Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe, said.

He warned that if energy prices remain high or rise further, the economy will slide closer to stagnation.

Even if sentiment is suffering enormous setbacks and fears of another year of stagnation have returned, it should be clear that the planned investments in defence and infrastructure are still on track and should support the economy this year and beyond, Carsten Brzeski, global head of macro at ING, said. 

“The fiscal impulse is real, it just needs time to reach the real economy,” Brzeski added. 

Germany last year approved a 500-billion-euro fund for infrastructure with the hope of reviving the economy. 

However, the Iran war has again postponed the long-awaited recovery, and Germany’s economy ministry this week cut its growth forecasts for 2026 and 2027 and raised its inflation projections.

Joerg Kraemer, chief economist at Commerzbank, said growth this year is likely to be a substantial 0.4 percentage points lower even if the Strait of Hormuz reopens at the end of May. 

“But every additional day without oil shipments through the Strait of Hormuz increases the risk of recession,” Kraemer said.

(Reporting by Maria Martinez, Linda Pasquini, Klaus Lauer and Reinhard Becker, editing by Miranda Murray, Gareth Jones and Andrew Heavens)