German Business Confidence Slumps to 16-Year Low

By Gabi Thesing

Nov. 24 (Bloomberg) -- German business confidence slumped to the lowest level in almost 16 years in November as the global financial crisis sapped demand for exports.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 85.8 from 90.2 in October. That’s the lowest since February 1993. Economists expected a decline to 88.7, according to the median of 41 forecasts in a Bloomberg News survey.

German companies such as BASF SE, the world’s largest chemicals maker, and carmakers Bayerischer Motorenwerke AG and Daimler AG are scaling back production as export orders dwindle. With Germany’s economy helping to drag the euro region into the first recession since its inception, the European Central Bank is under pressure to lower interest rates aggressively when policy makers next convene on Dec. 4.

“I expect the ECB to cut by a minimum of 75 basis points, if not 100 basis points,” Ifo economist Gernot Nerb told Bloomberg Television. “Less is hardly imaginable. Companies see orders weakening, so there is the fear that it will get worse.”

Ifo’s measure of business expectations fell to 77.6, the lowest since records for a reunified Germany began in 1991, from 81.4. A gauge of current conditions declined to 94.8 from 99.9.

Worst Since WWII

The International Monetary Fund predicts advanced economies including the U.S. and 15-nation euro area will contract simultaneously next year for the first time since World War II, with Germany’s forecast to shrink 0.8 percent.

The economy fell into the worst recession in at least 12 years in the third quarter and the country’s benchmark DAX index has tumbled almost 50 percent this year. In the euro region, manufacturing and service industries contracted at the fastest pace in at least a decade this month.

“Europe is Germany’s biggest export market, so if those economies tank we’re in real trouble,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt.

“I believe hardly anyone has ever before seen such a slump in demand,” BASF Chief Executive Officer Juergen Hambrecht told Bloomberg Television on Nov. 19. “We’re bracing for a somewhat tougher year in 2009.”

BASF lowered its profit forecast for a second time and said it will halt or curtail production at plants in Germany, Belgium, the U.S. and China, forcing about 20,000 employees, or one-fifth of its workforce, to work shorter hours and take unused vacation.

ECB Rate Cuts

The financial crisis that began with the U.S. housing slump and drove Lehman Brothers Holdings Inc. into bankruptcy has prompted central banks around the world to lower interest rates.

The ECB has reduced its benchmark rate by a percentage point to 3.25 percent in two steps since Oct. 8. Investors are betting it will lower the rate to 2.5 percent next week, Eonia forward contracts show.

Chancellor Angela Merkel’s government has also taken steps to shore up the German economy. On Nov. 5 it agreed on a stimulus package aimed at unlocking 50 billion euros ($63 billion) in investment. The two-year program ranges from tax breaks for buyers of new cars to greater financial help for improving buildings’ energy efficiency.

Merkel is now facing growing pressure from members of her party, the Christian Democratic Union, to reduce income taxes to boost consumer spending.

Still, the measures are unlikely to offset the impact of a decline in demand for exports -- the country’s economic motor. Deutsche Bank AG expects a 1.5 percent drop in gross domestic product in 2009.

“It’s going to be tough for German companies,” said Stefan Bielmeier, a Deutsche Bank economist in Frankfurt. “I can’t see who they could be selling to.”

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net