Brexit, Italy, and trade tensions weigh on German economy

German business morale deteriorated slightly more than expected in October as trade tensions, the possibility of Britain leaving the European Union without a deal, and concerns about Italy’s finances dampened confidence.

The Munich-based Ifo economic institute said on Thursday its business climate index fell for the second month in a row to 102.8. That was lower than a Reuters consensus forecast of 103.0.

“Firms were less satisfied with their current business situation and less optimistic about the months ahead,” said Ifo chief Clemens Fuest. “Growing global uncertainty is increasingly taking its toll on the German economy.”

Consumption and state spending have been the main drivers for growth in Germany as exports weaken. The dynamic domestic economy is expected to continue propelling an upswing seen entering its 10th year in 2019.

But the risk of a no-deal Brexit, trade tensions and a lack of skilled workers are weighing on the growth outlook for Europe’s largest economy.

“The picture of the economy has become clearer,” said Thomas Gitzel of VP Bank Group. “The German economy is sliding into a weak phase. Trade disputes, tough Brexit negotiations and concerns about Italy’s state finances are unnerving companies.”

The government said earlier this month it expected growth to be slower in the third quarter, citing bottlenecks in the car sector stemming from the introduction of new pollution standards known as WLTP as a factor.

The government has also lowered its economic growth forecast for this year to 1.8 percent from 2.3 percent previously. It expects Europe’s biggest economy to expand at the same pace in both 2019 and 2020. The economy grew 2.2 percent last year.