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German economy 'could shrink up to 20%' as business morale gets 'extraordinarily dire'

Jill Petzinger
Jill Petzinger, Germany Correspondent, Yahoo Finance UK
A 'Keep your distance! warning sticker on the floor of the departure lounge at the airport in North Rhine-Westphalia, Duesseldorf, Germany. (Federico Gambarini/Picture alliance via Getty)

The German government met to pass a historic €750bn (£683bn) stimulus package on Wednesday 25 March to mitigate the economic impact of the coronavirus pandemic and help companies survive, and safeguard jobs and livelihoods.

It remains to be seen, however, whether the measures will be able to boost the confidence of company bosses, which is now at its lowest level since the financial crisis in 2008/2009.

The Ifo Institute released its monthly business morale index today. It showed a drastic slump in the business climate in Europe’s largest economy in March, dropping to to 86.1 from 96 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." 

An economist from the Ifo institute told Reuters that the German economy could shrink by as much as 20% this year, depending on how long the country remained on coronavirus-lockdown. 

Read more: Germany bids goodbye to ‘black zero’ with €750bn coronavirus package

ING Germany chief economist Carsten Brzeski noted that during the financial crisis, the German economy contracted in four consecutive quarters with an accumulated loss of 7%, but could contract by that much now in two quarters, or “in a worst-case scenario even in a single quarter.”

Brzeski estimates that even if the country-wide shutdown were to be lifted gradually after the Easter holidays, the economy would still shrink by more than 4% year-on-year in 2020: “The longer the lockdown lasts, the more the size of the contraction will resemble numbers normally only seen in emerging economies — simply unprecedented.”

Covid-19 cases top 33,000

German chancellor Angela Merkel makes a press statement on the spread of the new coronavirus at the Chancellery, in Berlin on 22 March. Photo: Michael Kappeler/AFP via Getty Images

The number of confirmed coronavirus cases in Germany has now hit 33,000, according to Johns Hopkins Coronavirus Research Center. Despite the very high number of infections, there have only been 164 deaths from the virus so far.

Lothar Wieler, head of the Robert Koch Institute which monitors the virus in Germany, said that it was “still totally unclear how the epidemic would develop” and that it was too early to say if the new social isolation measures were having an effect. Germany now bans all but essential movement outside the house, and meetings of more than two people.

Experts have attributed Germany’s comparatively very low mortality rate partly to the fact that the country began testing extensively early on, when the virus first arrived in the country, and partly to the fact that the first wave of cases were among younger people, many of whom had returned from winter-sports holidays in Europe and recovered.

Read more: Coronavirus: Merkel goes into quarantine as Germany imposes extreme restrictions on public

Unlike in Italy, young German people tend not to live near or with their parents, which could also be a factor in terms of spreading the disease to the vulnerable elderly population.

However, the Robert Koch Institute expects the death toll to rise considerably in the coming weeks. This week the government announced funding to almost double the amount of emergency room beds; currently there are around 28,000 in the whole country.