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. 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.”
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.
“We have rising stock prices at a time when the economy is declining. This is heading towards a crisis.”
The problems are being felt by Germany’s massive car industry, while the survey suggests more than 80 percent of factories are in contraction.
As well as concerns over Brexit, pessimism is also being driven by Mr Trump’s bullish approach to international trade, with the Ifo not ruling out a technical recession in spring and summer – meaning shrinking economic output two quarters in a row.
The survey follows a warning by IHS Markit that manufacturing activity for the wider eurozone has fallen to levels last seen at the height of the 2012 European debt crisis.
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.”
(Additional reporting by Monika Pallenberg)