Germany’s business climate improved slightly in January, but expectations fell to a one-year low. Concerns over bureaucracy and US tariffs continue to weigh on the German economy. Markets slumped as China’s DeepSeek AI shook the tech sector.
The German business climate showed a mixed picture in January, with a slight improvement in current conditions but a decline in expectations, which have dropped to their lowest level in a year.
According to the latest report from the ifo Institute, the overall ifo Business Climate index edged up to 85.1 in January from 84.7 in December, exceeding expectations of 84.7. However, the index remains near its lowest levels since 2022, when the country was grappling with an energy crisis.
The ifo Current Conditions index rose to 86.1 in January from 85.1 in December, surpassing forecasts of 85.4 and reaching its highest level since August. Meanwhile, the ifo Expectations index fell to 84.2 from 84.4, marking its lowest reading since January 2024.
“Companies continue to be pessimistic,” ifo Institute president Clemens Fuest said.
Germany’s regulatory burdens under scrutiny
In recent days, the ifo Institute has urged policymakers to address bureaucratic hurdles that slow business expansion, advocating for market-based instruments over excessive regulation.
“To avoid the costs of excessive bureaucracy in Germany, policymakers should rely more on market-based instruments when it comes to new legislation. Market-based approaches usually entail less bureaucracy, as they are based on general rules and require less state control and monitoring,” said Sarah Necker, Director of the Ludwig Erhard ifo Centre for Social Market Economy.
Germany is preparing for early elections in February, with its economy remaining sluggish. Whether a new government can drive a recovery will depend on its commitment to reform.
“The number of regulations and the costs they incur for companies have risen continuously in recent years. They now amount to almost €30 billion per year,” Necker added, stressing the need for transparency in evaluating regulatory costs.
Trade policy concerns amid US tariff threats
The ifo Institute also weighed in on international trade, a particularly sensitive issue as the new US administration under Donald Trump threatens Europe with tariffs.
According to ifo trade expert Lisandra Flach, Germany and the EU must pursue more trade agreements and avoid jeopardising negotiations with excessive sustainability demands.
“The global dynamic has changed fundamentally. If Europe wants to continue to play a role as a global player in the future, it should recognise the new geopolitical situation and adopt a more pragmatic approach to trade agreements,” Flach stated.
Markets tumble as China’s DeepSeek shakes AI landscape
The release of the German business confidence report was not the main driver of Monday’s sharp market declines. Instead, a major shock to the tech sector came from China’s DeepSeek, which unveiled DeepSeek-R1, a reasoning model that outperforms OpenAI’s GPT-4o at a fraction of the cost.
This development has triggered panic among semiconductor stocks as China’s AI capabilities now rival the best US models while using less powerful and cheaper chips as well as energy.
Futures on the Nasdaq 100 tumbled more than 3% by 10:20 CET, with Nvidia Corp plunging 8% in premarket trading.
Dutch semiconductor giant ASML Holding NV plummeted over 9%, heading for its worst session since mid-October, when a weak earnings outlook sent shares down 15.5%.
The Euro STOXX 50 index declined by 1.2%, with ASML Holding, Schneider Electric SE falling 7.8%, and Siemens AG losing 4.5% among the worst performers.
Germany’s DAX 40 also dropped 1.2%, weighed down by heavy losses in Siemens Energy, which plunged 17%, while Infineon Technologies fell 4.5%, Rheinmetall declined 3%, and SAP slipped 1.5%.
In currency markets, the euro weakened by 0.2% to $1.0480.