The business mood in Germany was also unexpectedly weakened in September, with the ifo Business Climate Index decreasing to 87.7 in September compared with 88.9 in August, ending a six-month run of improvement, and lower than expected by economists of 89.3. The decrease can be interpreted as growing pessimism of the companies of Germany, which stated decreased levels of satisfaction with the present activity and pessimistic prospects.
Business confidence drops across multiple economic sectors
The ifo Business Climate Index, a key barometer of corporate sentiment in Germany, dropped to 87.7 in September from 88.9 in August, according to Euronews. The decline reflects increasing pessimism among German companies, who reported lower satisfaction with current activity and gloomier expectations for the months ahead.
“Prospects for an economic recovery have suffered a setback,” noted Clemens Fuest, president of the ifo Institute, as weakness spread across most sectors. Manufacturers cited another drop in new orders, while the service sector saw sentiment slide to its lowest since February, dragged down by a sharp deterioration inย transport and logistics.
The current assessment index misses expectations significantly
The Current Economic Assessment Index dropped to 85.7 during the same period from 86.4 in August, missing the estimated 86.5 reading, according to FXStreet. The IFO Expectations Index, which indicates firms’ projections for the next six months, declined toย 89.7 in September, versus 91.6 in the previous month and 92 expected.
German stimulus plans face execution challenges ahead
According to Oliver Rakau, chief German economist at Oxford Economics, the scale and structure of the German fiscal stimulus may struggle to deliver a timely boost to growth. “The German government has initiated an ambitious fiscal easing. But its investment-heavy nature, large scale, and focus on sectors already at capacity amid a tight labour market make delays likely,” Rakau said.
Past data shows Berlin has repeatedly fallen short of its investment targets. A 10% shortfall in executing the current infrastructure and defence plans could shave 0.4 percentage points off next year’s GDP growth, Rakau warned. Although some spare capacity exists in construction, bottlenecks remain widespread, particularly inย defence-related sectors, which have been booming for years.
Labour shortages constrain economic growth potential
Labour shortages are another major constraint. Germany’s unemployment rate remains among the lowest in Europe, and despite a drop in capacity utilisation, employers continue to report persistent shortages of skilled labour. Attracting enough qualified foreign workers to ease the crunch is proving difficult. “We aren’t convinced that the government’s measures to ease bottlenecks will bear fruit quickly enough,” Rakau added. “This is one reason we seeย below-consensus GDP growthย in 2026.”
European stocks slip amid broader market concerns
The weak German data added to a broader pullback in European markets, already on edge after Federal Reserve Chair Jerome Powell warned that rate cuts are not given in the US, citing ongoing risks around inflation and labour market imbalances. Powell also added that equity markets are “fairly highly valued,” raising some concerns among investors.
On Wednesday, the EURO STOXX 50 slipped 0.3%, mirroring a drop seen in the broader EURO STOXX 600. Italy’s FTSE MIB, weighed down by bank stocks, led declines with a 1.3% drop, while France’s CAC 40 fell 0.4% and the German DAX edged 0.2% lower. The euro weakened to $1.1770, on track to notch itsย fifth loss in seven sessions. The sudden drop in the sentiment of business in Germany highlights the growing difficulties for the largest economy in Europe, even with extensive fiscal stimulus policies.
The risks of labour shortages, sluggish execution, and sector bottlenecks are likely to limit the growth momentum as global investors are shifting more towards Wall Street rather than European markets. Since Germany is grappling with structural economic headwinds, the efficiency of the investment-intensive fiscal policy of Berlin is questionable in the face of recurring structural capacity limitations and implementation issues.