Bleak end to the year as German business morale drops

18/12/2025 04:33 AST

German business sentiment fell to its lowest level in seven months in December, a survey showed Wednesday, with Europe's beleaguered top economy set to end the year on a gloomy note. The Ifo institute's confidence barometer dropped to 87.6 points from 88 points in November, its second straight monthly drop and in line with analyst expectations.

"The year is ending without any sense of optimism," said Ifo president Clemens Fuest.

The German economy is struggling to emerge from a long downturn, hit by a manufacturing slump, increasing competition from China and the US tariff onslaught.

Chancellor Friedrich Merz vowed to kickstart growth but, after an initial burst of optimism, gloom has set in as businesses complain there is little sign of serious reform or a promised public spending blitz. In the Ifo poll, which surveys about 9,000 businesses every month, sentiment in the crucial manufacturing sector slipped as companies reported worse expectations for the future.

"The number of new orders declined, and companies are planning to scale back production," it said. Morale also fell in the area of trade, with retailers reporting disappointing Christmas sales, as well as in the service sector.

The survey "suggests that the long-awaited recovery in the German economy still has not materialized, with the fiscal stimulus not yet having a meaningful impact," said Franziska Palmas, senior Europe economist from Capital Economics.

After meagre growth this year, the economy is expected to pick up speed in 2026 on the back of the government spending ramp-up on defence and infrastructure. But economists are growing more gloomy about the prospects for next year, with leading institutes last week cutting their forecasts to between 0.8 and one percent expansion. The government is forecasting growth of 1.3 percent in 2026.

Germany's conservative-led government agreed Wednesday to overhaul unemployment benefits so job seekers who break rules face tougher penalties, a hotly disputed reform that fuelled tensions in the ruling coalition.

The "citizens' income" benefit was a key policy of the previous, centre left-led government but critics on the right argued it was too generous and did not do enough to encourage the unemployed into work. After weeks of rancorous debate, Chancellor Friedrich Merz's coalition, led by his centre-right CDU party, signed off on abolishing the former benefit system and replacing it.

It was sensitive for the centre-left SPD as the party-the CDU's junior coalition partners-had to do a U-turn on a major piece of legislation they had introduced, and it provoked protests from their youth wing.

The draft bill from the office of the SPD's Labour Minister Baerbel Bas insisted, however, the changes would "rebalance the relationship between support and participation, between solidarity and personal responsibility". Merz said the overhaul would ensure that "our welfare state remains viable for the future". Central to the reform is introducing tougher penalties to encourage job seekers back into work.

Those who refuse reasonable employment that could end their need for state support can lose government payments for up to two months.

Other violations, such as failing to submit job applications or dropping out of training courses, could see their monthly payments reduced by 30 percent for three months. Repeatedly missing appointments at the job centre can result in a complete loss of benefits. Germany's unemployment rate has been ticking up as the economy struggles through a long downturn, with traditional manufacturers in particular shedding jobs as international competition intensifies.

Bas said Wednesday the goal of the reform was "to get people into permanent employment" but she also stressed that those who need help will still be able to "rely on the support of the state" in the future. The changes still have to be voted through parliament. Over five million people a month claimed "citizens' income" in recent times, which is 563 euros ($660) for a single person. It costs the government about 50 billion euros a year.

AFP