Business confidence in Germany plummeted to its lowest level since the COVID-19 pandemic because of growing fears that record inflation and limited energy supplies will bring Europe's largest economy into recession. The expectations index released by the Ifo on Monday showed a decrease to 80.3 in July, from 85.8 in June. Analysts had forecasted a fall to 83.0. The current conditions index also declined.

"Germany is on the verge of a recession," Clemens Fuest, president of the Ifo Institute, said. "High energy prices and the threat of a gas shortage are weighing on the economy. Companies expect a significant deterioration in business activity in the coming months," she added.

The report reflected the growing discouragement in Germany, whose post-pandemic recovery has already slowed due to sky-high inflation and component shortages, which were exacerbated by the conflict in Ukraine. An indicator from the S&P Global showed that the economy began to contract in July.

The Bundesbank warned last week that price increases are likely to remain elevated in the coming months and may even resume their rise in September as temporary mitigation measures end. Concerns about gas supplies affect the outlook as well. The key risk for Germany is that a further slowdown or halt in energy supplies could lead to even higher inflation.

Consumers and businesses already under pressure from rising prices now have to contend with higher interest rates after the European Central Bank raised borrowing costs last week. Rates may also continue to rise after the recent, larger-than-expected hike.