IFO sees a high risk of 5% to 20% contraction in the German economy in 2020

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on Mar 25, 2020
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  • IFO sees a high risk of 5% to 20% contraction in the German economy in 2020.
  • IFO German business climate drops to 86.1 in March versus 96.0 in February.
  • German lawmakers to consider a £683.30 billion rescue package.
  • IFO economist Klaus Wohlrabe expects a severe recession for two quarters in Germany.

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IFO revealed the German business climate to have dropped to 86.1 in March amidst the Coronavirus emergency that has disrupted business and is pushing the global economy closer to a recession. The last time German business morale was recorded this down was during the 2009’s global financial crisis.

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In February, IFO had revealed the German business climate at a much higher 96.0. Economists had expected the business morale to fall steeply to 87.9 in March.

According to IFO President Clemens Fuest:

“This is the steepest fall recorded since German reunification and the lowest value since July 2009.”

He also added that the German economy is currently facing a shock. Wednesday’s data showed business expectations to have slumped to the worst while companies also reported significant worsening in their current situation assessment.

German Lawmakers To Consider A £683.30 billion Rescue Package

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In his statement on Wednesday, IFO economist Klaus Wohlrabe said that the German economy can post up to a 20% decline in 2020 attributed to the fast spread of COVID-19. German lawmakers are currently considering a £683.30 billion worth of rescue package to support business and economic growth in Germany. The unprecedented package requires the parliament to suspend the debt brake.

According to Wednesday’s data, business morale in the German services sector dropped to the lowest since 2005 when record-keeping first started. The manufacturing sector, on the other hand, printed a reading that was last seen in August 2009. The expectations sub-index noted the sharpest decline in March in the 70 years of record-keeping.

All in all, depending on the time period for which businesses and governments remain shut due to the pandemic, IFO sees the German economy at a risk of 5% to 20% contraction this year.

Wohlrabe Expects A Severe Recession For Two Quarters Amidst COVID-19 Crisis

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Wohlrabe also highlighted in his statement on Wednesday that the health emergency is likely to fuel a severe recession that can be expected to span over two quarters at least.

The forex market didn’t respond too aggressively to the economic data on Wednesday. EUR/USD opened at 1.0785 this morning and climbed as high as 1.0850. Much of the gain, however, was lost later in the day with the currency pair currently exchanging hands around 1.0815.

In times of extreme volatility, EUR/USD is expected to continue trading between the 1.10 resistance and 1.0630 support. The overall outlook of the currency pair is currently bearish.

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