Europe's biggest economy has seriously hit the skids, a key survey showed on Monday, leading analysts to forecast a German recession well into next year. German business confidence dropped to its lowest point in more than five years in October, the widely-watched Ifo index showed, as the world's leading exporter was hit hard by the international financial crisis.
The monthly business climate index calculated by Munich-based economic research institute Ifo fell to 90.2 points from 92.9 points in September, its fifth straight drop. It marked the lowest level since May 2003, when the index stood at 89.6 points. A sub index of expectations for the next six months dropped to an all-time low point of 81.4 points.
"Germany is heading for a serious recession," said Bank of America senior economist Holger Schmieding, adding that it "may not abate before mid 2009." At Commerzbank, Ralph Solveen was equally categoric, saying: "The message is clear: the German economy is on the way to recession or is already there." The euro fell under 1.24 dollars to a two-year low point after the survey was released.
Although the current German business situation was seen as essentially unchanged, those who answered the Ifo survey "are considerably more sceptical regarding the outlook for the coming six months," a statement quoted Ifo president Hans-Werner Sinn as saying. The German government expects the economy to grow by just 0.2 percent next year, with the economy ministry noting last week that "weakness of the global economy has weighed on export."
In the key manufacturing sector, Ifo found that German businesses expected exports to weaken further, while surplus production capacity had grown and plans to hire new workers had been shelved.
Factors supporting the German economy such as lower oil prices and the euro's fall in value against the dollar "are by far not able to compensate for the erosion in vital foreign demand," said UniCredit Markets vice president Alexander Koch. Germany's situation was mirrored across in the 15-nation eurozone, with a purchasing managers' index compiled by data and research group Markit sliding to a record low of 44.6 in October, according to an initial estimate.
The index's fall was its fifth consecutive month of contraction as well. Both the German and eurozone economies contracted in the second quarter of 2008, and if they shrink in the third they will meet the technical definition of recession. "We first have to brace ourselves for a serious downturn before we can look forward to any improvement sometime next year," Schmieding said.