Mario Draghi, president of the European Central Bank (ECB) admitted the situation was getting “worse and worse” and offered a gloomy prognosis for the economies of both Germany and Italy. The Munich-based Ifo Institute’s business climate indicator, which measures the confidence of 9,000 managers on a monthly basis, fell from 95.7 points from 97.5 points compared with June.
Mr Fuest also urged Mr Draghi to resist the temptation to reduce the exchange rate in comparison with the US dollar.
He said: “The ECB should not be easing policy at all. If it brings down the exchange rate, it makes it more likely that Trump will respond by restarting the trade war.
“Loose money is making matters worse and is getting dangerous.”
The latest survey marks the fourth month in a row the index has recorded a drop. Clemens Fuest, Ifo president said: “The car manufacturers still have great worries. Exports are again more focused on shrinkage.
“The same applies to companies in metal production and processing. In the key sectors of mechanical engineering and electrical engineering, export momentum has come to a standstill. No growth is currently expected.”
Mr Fuest said confidence was in “free fall”, with the German economy “in difficult waters”.
He added: “All the problems are coming together.
“It’s China, it’s increasing protectionism across the board, it’s disruption to global supply chains.”
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Mr Draghi, who acknowledged the situation was getting “worse and worse”, said Germany and Italy were both feeling the pinch.
He added: “We still see the risk of recession being pretty low, all in all,” he said. But jobs are a lagging indicator.”
Nevertheless he admitted: “On the inflation front we don’t like what we see.”
It comes as Euro zone government bond yields began to reverse some of the rises seen after Thursday’s European Central Bank meeting, where policymakers left rates
unchanged but opened the door to more easing, underwhelming investors who had hoped for more.
Expecting Draghi to prepare the ground for another round of monetary easing, if not a rate cut, investors had piled into euro zone government bonds before the meeting, but some of the positioning was unwound during Draghi’s comments to the press.
Draghi told reporters “this (economic) outlook is getting worse and worse”, increasing the need for stimulus. But investors latched on to his comment that the ECB wanted to see more projections of how the economy was performing before taking action.
Commentators were quick to point out that Draghi has delivered everything but the cut – signalling both tiering and the resumption of asset purchases – and euro zone bond yields began to retreat from the rises seen in both the core and the periphery.
German 10-year bond yields were around one basis points lower at -0.373%, eading back down towards the record low of -0.422%, recorded on Thursday.
Most other 10-year yields in the bloc were also around two basis points lower.
“The ECB’s dovishness has been massively under-estimated,” Mizuho analysts wrote in a note on Friday.
With tiering now likely, they said, the ECB has no effective lower bound to its policy rates, meaning that “real rates can now be pushed to extremely negative levels.” However, the bank does not believe that the next easing steps will be successful.
(Additional reporting by Monika Pallenberg)