Escalating credit burdens complicate an already troubled economy - corporate credit costs skyrocket during economic downturns

The ifo Business Climate Index, a key indicator of economic conditions in Germany, has taken a turn for the worse. The index, published by the ifo Institute, came in at 84.3 points for today, falling short of the forecasted 87.0 points and last month's figure of 88.5 points.

The decline in the ifo Business Climate Index suggests a worsening economic outlook for Germany. Over the past five years, the index has shown a significant decline, particularly over the past 12 months. This downward trend is a cause for concern, especially for businesses that are heavily reliant on corporate credit, such as those in the manufacturing, real estate, and large-scale services sectors.

The spread between new and old credit rates has widened to a record high, with corporate credit rates rising by 177% this year, effectively tripling compared to the low of 1.02% in August 2019. The cost of refinancing corporate debt in Europe has also reached a record high.

The Corporate Credit Index from Barkow Consulting rose by 0.45 percentage points to 4.38% last week, marking its highest level in over 11 years. New credit rates are rising rapidly, putting a strain on businesses with significant financing needs.

The ifo Business Climate Index trajectory, as shown in the chart from TradingView, illustrates the worsening economic conditions in Germany. In a recession, companies may borrow at much higher credit costs, which could have a significant impact on their profit and loss statements. The impacts on these businesses are typically visible with a lag of a few quarters, likely becoming evident by late 2025 or early 2026 as higher interest expenses increase financial costs and reduce net profits.

The deteriorating economy in Germany is a significant concern for businesses, and the continuing rise in corporate credit costs is a cause for worry. It is essential to keep a close eye on these economic indicators to understand the current state and future direction of the German economy.