By Rachel More and Rene Wagner
BERLIN (Reuters) - German business morale unexpectedly worsened in January, declining for the second month in a row as Europe's largest economy struggles to shake off a recession and short-lived optimism gives way to fears of another weak year.
The Ifo institute said its business climate index fell to 85.2 from a slightly downwardly revised reading of 86.3 in December. Analysts polled by Reuters had expected the indicator to improve in January to 86.7.
"The German economy is stuck in recession," said Ifo president Clemens Fuest.
German gross domestic product (GDP) contracted by 0.3% in 2023.
"The tentative revival of optimism last autumn has turned out to be very short-lived," said ING economist Carsten Brzeski, forecasting another shallow recession this year of -0.3%.
Last year Germany was plagued by persistently high inflation, high energy prices and weak foreign demand, and topped off with a budget meltdown that prompted deep subsidy cuts while rattling the nation's fractious coalition government.
As trade disruptions caused by Houthi attacks on shipping in the Red Sea bring fresh concerns for Germany's export industry, the closely watched composite PMI index fell for a seventh consecutive month in January.
However, Ifo's head of surveys told Reuters that supply chains remained robust in the face of the Red Sea attacks.
"They have not yet led to supply bottlenecks for raw materials and primary products," Klaus Wohlrabe said.
2024 RECESSION FEARS
The start of the new year also brought mass farmer protests and nationwide rail strikes, as discontent grows over Chancellor Olaf Scholz's economic policies.
On Wednesday, the Ifo revised down its growth estimate, with the economy now expected to rebound by a meagre 0.7% this year.
Further highlighting Germany's economic woes, particularly the outlook for its struggling property sector, other data released on Thursday showed incoming orders in the country's construction industry fell 7.4% month-on-month in November
"Most economists are still too optimistic," said Joerg Kraemer of Commerzbank (ETR:CBKG), which is also expecting a 0.3% decline in GDP this year.
The Ifo's current assessment and expectations components, based on a survey of around 9,000 managers, also dimmed in January.
"The business climate is keeping hopes for growth in the current quarter at zero," said Alexander Krueger of Hacuk Aufhaeuser Lampe.
"Unfavourable location conditions and unsettling economic policy are major problems," he added.