German Business Sentiment Worst Since 2009 Amid Covid-19 Outbreak

germany feb14 19mar20

Germany's business confidence plunged to its lowest level since the global financial crisis as the spread of coronavirus took its toll on economic activity, survey results from the think tank ifo showed Thursday.

The ifo also downgraded its GDP forecast sharply due to the coronavirus, or Covid-19, pandemic.

Elsewhere, the think tank DIW also predicted a recession for the Germany economy this year.

The business confidence index fell to 87.7 in March from 96.0 in February. This was the biggest fall since 1991 and the weakest reading since August 2009.

The German economy is speeding into a recession, ifo President Clemens Fuest said.

The business situation index slid to 93.8 from 99.0 a month ago. Likewise, the expectations index declined sharply to 82.0 from 93.2 in the previous month.

The March survey is based on around 90 percent of the usual number of responses. This was conducted between March 2 and 18.

All sectors reported sharp declines in March. In manufacturing, business sentiment hit its lowest since August 2009 and confidence among service providers logged the biggest drop since the survey began in 2005.

Confidence in trade also collapsed in March. But the fall in construction was comparatively moderate.

In order to stem the spread of new coronavirus infections, the government is restricting freedom of movement bringing public life largely to a standstill.

Consequently, the German economy is forecast to shrink 1.5 percent this year before expanding 3.7 percent in 2021, the ifo said in its spring forecast. In December, the think tank had forecast 1.1 percent growth for 2020.

In the first quarter of 2020, the ifo projected 0.1 percent expansion, but with the crisis taking full effect in the second quarter, GDP would fall 4.5 percent.

Regarding the labor market, the ifo said the unemployment rate will rise to 5.3 percent this year from 5 percent in 2019.

The ifo also presented a risk scenario in which the economic collapse was exacerbated, the recession prolonged, and the recovery slowed down.

"Under this scenario, the decline in economic output this year would rise to 6.0 percent, and at the end of 2021 GDP would still be 2.0 percent below the level it would have reached without the coronavirus crisis," the institute warned.

The DIW institute forecast only 0.1 percent contraction for 2020, based on the assumption that Germany will normalize quickly from the crisis situation.

However, if the impact of coronavirus on the economy deepens and persist longer, then the recession could be much more severe, the think tank warned.

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