German recession could be less severe than expected, survey shows

German business confidence improved in November, a key survey said Thursday, as hopes grow that a looming recession in Europe's top economy will be less severe than feared.

Published: 24 November 2022 13:27 CET

An employee at a shop handles cash. Germany is facing tough times economically, according to experts. Photo: picture alliance/dpa | Fabian Sommer

The Ifo institute’s monthly confidence barometer, based on a survey of about 9,000 companies, reached 86.3 points, rising for a second month after a revised 84.5 points in October.

Before October, the reading had fallen for four months straight.

“Sentiment in the German economy has improved,” Ifo president Clemens Fuest said in a statement.

“Pessimism regarding the coming months reduced sharply. The recession could prove less severe than many had expected.”

Germany is facing soaring inflation – consumer price rises hit 10.4 percent in October – driven by high energy costs after Russia slashed gas supplies following its invasion of Ukraine.

The government has forecast that Europe’s economic powerhouse will contract 0.4 percent in 2023, with inflation set to remain stubbornly high.

But hopes are growing that government relief measures – including a €200 billion package to shield companies and citizens from inflation – will soon bring prices down.

Germany’s gas storage facilities were completely filled up earlier this month, easing fears of winter shortages.

Carsten Brzeski of ING bank said the Ifo survey “adds to recent glimmers of hope that the German economy might avoid a winter recession.”

But he added the government stimulus “will come too late to prevent the economy from contracting in the fourth quarter.

“However, it is substantial enough to cushion the contraction and to turn a severe winter recession into a shallow one.”

Other surveys have started to show signs of improvement.

Earlier this month, a ZEW institute survey showed an increase in investor confidence for the second consecutive month.

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“The number of employees in Germany is to be successively reduced by 11,000 to 14,000 from the current level of around 54,000 by 2028,” ZF said in a statement.

The decision to significantly reduce the size of its domestic workforce was needed to “respond to the changes in the mobility sector, particularly in the field of electromobility”, ZF said.

The move was “difficult but necessary”, ZF chief executive Holger Klein said in a statement.

“The seriousness of the situation calls for decisive action to be able to adapt the company to the tougher market and competitive environment,” Klein said.

Restructuring the auto supplier in Germany was needed to “strengthen our competitiveness and consolidate our position as one of the world’s leading suppliers”, Klein said.

Strong competition, cost pressures and weak demand for electric vehicles meant the restructuring would focus on ZF’s electric motors division, the group said.

The emerging market, in which Chinese manufacturers have taken the lead, was “highly competitive”, ZF said.

Building the motors for electric cars had “low margins” and the group was struggling to “cross-finance purely electric drives” from its efforts in conventional and hybrid vehicles, ZF said.

The switch to electric vehicles was eating away at demand for “transmissions for conventional and hybrid vehicles”, an area where German suppliers have traditionally excelled, it said.

At the same time, “the current glaring weakness in demand for purely electric vehicles” meant ZF had been left with overcapacity in areas backed with high investments.

Despite the difficulties, “the future belongs to electromobility”, CEO Klein said.

ZF would continue to “invest heavily in this area”, he promised, but would have to explore cooperation with other firms in the area to remain competitive.

‘Leaner’

As part of the restructuring, the Friedrichhafen-based supplier said it would “increase its investments” in the areas of in-car technology, vehicle chassis, industrial tech and aftermarket services.

ZF’s network in Germany would be made “leaner” after recent acquisitions had seen it gradually expand, the group said.

The ultimate extent of the job cuts would depend on “the further development of the markets”, ZF said.

EU plans to outlaw the sale of new fossil fuel-powered cars from 2035, means some jobs in the industry will inevitably become redundant.

Meanwhile, Chinese manufacturers have grabbed the advantage in electric vehicles and are hauling in a growing share of the market.

The Chinese battery-maker CATL has grown in short order to become the world’s third largest auto supplier.

The double shock delivered by the end of combustion engines and rising Chinese competition has piled pressure on European suppliers.

Besides ZF, parts makers like Bosch, Continental and Webasto have been among the companies in the sector to have announced job cuts.