March 25, 2020 / 9:13 AM / 5 months ago

German economy could shrink by as much as 20% due to coronavirus - Ifo

BERLIN (Reuters) - Germany’s economy could contract by as much as 20% this year due to the impact of the coronavirus, an Ifo economist said on Wednesday, as German business morale tumbled to its lowest level since the global financial crisis in 2009.

Containers are loaded on freight trains at the railroad shunting yard in Maschen near Hamburg, Germany November 14, 2019. REUTERS/Fabian Bimmer

The devastating forecast came as lawmakers were discussing an unprecedented rescue package worth more than 750 billion euros (681 billion pounds) for which the government wants parliament to suspend the constitutionally enshrined debt brake.

The Ifo institute’s final survey results showed that its business climate index slumped to 86.1 from 96.0 in February.

“This is the steepest fall recorded since German reunification and the lowest value since July 2009,” Ifo President Clemens Fuest said in a statement.

“The German economy is in shock,” Fuest said, adding that business expectations in particular had darkened as never before while companies’ assessment of their current situation also worsened sharply.

In the services sector, the business climate indicator posted its steepest drop since the data was first collected in 2005, Ifo said.

In manufacturing, the index fell to its lowest level since August 2009, with the sub-index for expectations posting the steepest drop in 70 years of industry surveys.

Ifo economist Klaus Wohlrabe told Reuters that the German economy could contract by between 5% and 20% this year depending on the length of the shutdown caused by the pandemic.

Wohlrabe added he expected there to be a severe recession that would last for at least two quarters.

“SIMPLY UNPRECEDENTED”

ING economist Carsten Brzeski said the established term “recession” was inadequate to describe an economy that has come almost to a standstill overnight.

“The longer the lockdown lasts, the more the size of the contraction will resemble numbers normally only seen in emerging economies. Simply unprecedented,” Brzeski said.

The German government so far expects gross domestic product to shrink by roughly 5% this year due to the outbreak.

The Ifo figures chimed with IHS Markit’s PMI surveys, released on Tuesday, that showed Germany’s service sector suffered a record contraction in March, pushing overall business activity to the lowest level since the 2009 crisis.

Finance Minister Olaf Scholz asked lawmakers earlier on Wednesday to suspend the debt brake, which restricts new borrowing to 0.35% of GDP, so the government could fight the coronavirus pandemic with “full force”.

The Bundestag lower house is expected to pass the rescue package later on Wednesday, including a debt-financed supplementary budget of 156 billion euros and a stabilisation fund worth 600 billion euros for loans to struggling businesses.

The government may even take direct stakes in companies.

Justice Minister Christine Lambrecht told the Handelsblatt business daily these could be partial or full if needed, to prevent the sell-off or break-up of key companies during the crisis.

Reporting by Michael Nienaber and Rene Wagner; Editing by Catherine Evans

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