Commerzbank’s Chief Economist Dr. Jörg Krämer warns that the sharp March drop in the German Ifo Business Climate Index reflects rising war-related risks rather than current damage. He notes that German growth and Euro area growth could be cut by 0.4 percentage points in 2026 if the Middle East conflict and Strait of Hormuz closure persist, undermining hopes for an upswing.

Ifo slump flags mounting growth risks

"The Ifo Business Climate Index fell sharply in March, from 88.4 to 86.4. The sharp decline was in line with expectations (consensus: 86.3). While companies' assessment of the current business situation is unchanged (86.7 after 86.7), expectations for the coming six months plummeted (from 90.2 to 86.0). All major sectors were affected by the decline in business sentiment."

"The unchanged current business situation indicates that companies are not yet suffering from the war in the Middle East in March. However, the slump in Ifo business expectations reflects that companies fear significant negative consequences for the future."

"If the war and the blockade of the Strait of Hormuz were to continue for another month or two, the economic damage signaled by today’s slump in the Ifo business expectations would materialize."

"According to our model estimates, this could reduce economic growth in the euro area and in Germany by around 0.4 percentage points this year. "

"The Ifo Business Climate Index can only be ignored if one expects the war to end in a few days and to have no major economic consequences. In this optimistic scenario, the Ifo Business Climate Index would recover in April."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)