Germany is 'on the cusp of a recession' amid Russia's natural-gas squeeze and energy inflation, economist says

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Germany is 'on the cusp of a recession' amid Russia's natural-gas squeeze and energy inflation, economist says
German Chancellor Olaf Scholz's administration is dealing with an unprecedented energy crisis.Abdulhamid Hosbas/Anadolu Agency via Getty Images
  • A popular measure of German business confidence has fallen to its lowest level since June 2020.
  • Market sentiment is hit by slowing natural-gas flows from Russia and energy inflation.
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A popular measure of German business confidence has slumped amid concerns that Germany might enter a recession.

The Ifo Institute's Business Climate Index fell to 88.6 in July — its lowest level since June 2020. The measure of business sentiment stood at 92.2 in June. It's based on a survey conducted by the Munich think tank of 9,000 managers across German businesses.

Clemens Fuest, the president of the Ifo Institute, said the threat of a gas shortage and high energy prices were weighing on Europe's largest economy.

"Companies are expecting business to become much more difficult in the coming months. They were also less satisfied with their current situation," Fuest said in a statement Monday. "Germany is on the cusp of a recession."

Results of the survey, released Monday, came just as the Russian state gas giant Gazprom said it would be slashing natural-gas flows to Europe to 20% of Nord Stream 1's capacity starting Wednesday. Russia restarted the pipeline Thursday after a 10-day scheduled maintenance, keeping gas flows to 40% of capacity — which was already lower than before.

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Gazprom said on Monday that it was cutting natural-gas flows again this week because of an equipment issue, but the German economy ministry said there was "no technical reason" for the reduction. The news sent benchmark European gas futures up as much as 10% on Monday, extending sharp gains that had already more than doubled prices this year.

The developments put pressure on Europe, which is already fretting over the possibility of a natural-gas shortage this winter. It depends on Russia for 40% of its natural-gas needs, from cooking in homes to firing power stations. Most of the fuel to Europe is delivered via pipeline.

"The Ifo business climate index, like the purchasing managers' index, now clearly points to a downturn in the German economy," said Jorge Kraemer, an economic analyst at Commerzbank, according to Reuters. "How bad it ends up, unfortunately, lies mainly in Putin hands."

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