Germany's business climate deteriorated sharply in September, according to a key survey published on Monday, the latest sign that Europe's top economy is heading for recession as it faces an energy crisis.

The Ifo (Information and Forschung) institute's monthly confidence barometer, based on a survey of about 9,000 companies, slipped 4.3 points to 84.3 from the previous month.

It was the fourth straight month of contraction, taking the indicator to its lowest level since May 2020, with the decline felt across the economy, from manufacturing to the service sector.

"The German economy is slipping into recession," said Ifo president Clemens Fuest. "Pessimism regarding the coming months has grown decidedly."

Germany is facing soaring inflation, particularly of energy prices, after Russia cut gas supplies through a key pipeline as tensions mount over the Ukraine war. While all of Europe is affected, Germany has been hard hit as it was heavily reliant on Russian supplies prior to the war. 

A recession in Germany was now "inevitable", said ING analyst Carsten Brzeski, pointing to "high inflation, surging energy prices, ongoing supply chain frictions and weakening global demand".

A recession in Germany was now "inevitable"- ING analyst Carsten Brzeski

In the survey, confidence in the manufacturing sector – a driver of the German economy – fell particularly sharply, recording a drop of 14.2 points. Businesses' assessment of the current situation also fell 3.0 points to 94.5 points.

The barometer was the latest warning that Germany is heading for a contraction, with the OECD also forecasting on Monday that Europe's economic powerhouse would shrink next year.

German GDP grew a slight 0.1 per cent between April and June.

Inflation rose at a 7.9 per cent rate in Germany in August, well above the two per cent target of the European Central Bank.