In December, the business climate index fell from 85.6 to 84.7, some 0.6 points below the consensus and reflecting a broad decline in confidence. The current situation index slightly rose by 0.8 points to 85.1, while expectations drastically fell by 2.8 points to 84.4, some 2.6 points below the consensus.

The latest report reveals a subdued economic outlook across key sectors, marked by declining confidence and mixed performance. In manufacturing, the climate deteriorated sharply as companies expressed lower satisfaction with current business and significantly dimmer expectations. The persistently weak order situation has forced announcements of production cutbacks, highlighting mounting pressures.

The service sector saw a noticeable decline in its index, driven by growing scepticism about the future. While current conditions showed slight improvement, sectoral disparities emerged. The catering industry remained buoyant, bolstered by robust Christmas business, but transport and logistics braced for challenges in the months ahead. In trade, optimism stalled after two months of improvement. Wholesale businesses led the downturn, with both current satisfaction and expectations sliding, while retail mirrored this pessimism, albeit to a lesser extent.

Interestingly, the construction sector defied the broader trend, reporting a modest improvement in business climate. Although companies viewed current conditions more favourably, their outlook for the future became increasingly cautious. The report reflects fragile confidence across industries as they prepare for potentially tougher times ahead. The latest update puts the German RPI at minus 14 and the RPI-P at minus 17, meaning that economic activity, in general, is performing behind market expectations.

With the economy in the doldrums, business climate is expected down slightly at 85.3 versus 85.7 in the prior month. Current conditions are seen at 83.8 versus 84.3 and expectations at 87.0 versus 87.2.

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.