German business morale unexpectedly worsened in December, according to a key survey Monday, which also showed a decline in both expectations and current conditions, as a year-end budget crisis deepened concerns about Europe's biggest economy after a difficult 2023.
The Ifo institute said its closely-watched business climate index stood at 86.4, versus the 87.8 forecasts by analysts in a Reuters poll, following a revised reading of 87.2 in November.
The reading, based on a survey of around 9,000 companies, disappointed analysts, who had been expecting another increase.
"Sentiment in German business has clouded over," said Ifo President Clemens Fuest said.
"As the year draws to a close, the German economy remains weak," Fuest noted.
The Ifo institute last week cut its forecasts for the German economy in 2024 to 0.9% growth instead of 1.4%.
"The fiscal woes of the last month have clearly left their mark on the German economy, with the country's most prominent leading indicator showing just how difficult it will be for the economy to bounce back," said Carsten Brzeski, global head of macro at ING.
The German government had to cut spending to plug a 17-billion-euro ($18.32-billion) gap in its budget for 2024 after a constitutional court ruling on unused pandemic emergency funds blew a 60 billion euro ($65 billion) hole in its finances.
The renewed decline in business sentiment in December echoes the message from the Composite PMI released last week, showing that Germany's economic downturn worsened this month, with both manufacturing and services activity contracting.
Companies were less satisfied with their business, with the current situation index falling to 88.5 from 89.4 in November.
They were also more skeptical about the first half of 2024, with the expectations component showing a decline to 84.3 in December from 85.1 in the previous month.
The German economy has a demand problem, Ifo's head of surveys, Klaus Wohlrabe, told Reuters.
He also noted that the data point to a slight contraction in gross domestic product in the fourth quarter.
The German economy already contracted in the third quarter. Two consecutive quarters of negative growth are considered a technical recession.
"It looks very likely that GDP (gross domestic product) will contract for a second successive quarter in the fourth quarter, and the outlook for 2024 does not look much better," said Capital Economics' chief Europe economist Andrew Kenningham.
Capital Economics forecasts the German economy will stagnate in 2024, reflecting the impact of higher interest rates on investment in construction and industry, the fiscal tightening and continued consumer caution amid a weakening labor market.
The latest reading shows that the "recession risk remains high, not only for 2023 but for 2024, too," ING's Brzeski said.