German economic sentiment was much weaker than expected in December, according to the latest ifo survey, confounding expectations of continued improvement after an autumn upturn.

The overall climate indicator fell to 86.4 from 87.2, below the consensus forecast of an increase to 87.8, breaking a two-month string of improvement.

Current conditions fell by 0.8 points to 88.5, while business expectations slumped by 08. points to 84.3.

Manufacturing activity was particularly weak, with the index declining to negative 17.2, the lowest since June of 2020, with energy-intensive industries reporting difficult conditions. Service activity was slightly brighter, with the index improving to minus 1.7 from negative 2.5 in November.

However trade conditions deteriorated, with companies assessing their current situation as"markedly worse", according to the ifo. The trade index declined to negative 26.6, also the weakest since mid 2020, from minus 22.2 previously.

Sentiment in the construction industry remained dire, with the index retreating to negative 33.1 from minus 29.5, the weakest level since 2005.

Clements Fuest, president of the Ifo Institue, issued a fairly gloomy outlook when speaking to Bloomberg, refusing to rule out a German recession in the second half of the year."We're waiting for this recovery that is not coming."

Fuest voiced particular concern about constraints on German government spending and the uncertain outlook for global trade. He expects a decline in eurozone interest rates in the second half of 2024, but that loosening"could come even sooner if the economy weakens," he said.

The latest data take the RPI to minus 31 and the RPI-P to minus 37, meaning the German economy is underperforming expectations.

The business climate index, which at 87.3 in November was slightly below expectations but up from October's 86.9, is expected to edge higher to 87.8 in December.

Ifo is an acronym from Information and Forschung (research). Published by Munich's Ifo Institute, the Business Climate Index is closely watched as an early indicator of morale in German industry. In addition to overall gauge of sentiment, data are provided on its two components, current conditions and expectations. As a forward looking indicator, the latter is normally seen as the more important. Ifo surveys more than 9,000 enterprises in manufacturing, services, construction, wholesaling and retailing and a separate estimate of sector confidence is supplied for each.

The headline index has a good correlation with developments in overall GDP and so has a major influence in shaping views on how the national economy is performing. The main focus is the expectations index.