German December Business Confidence Lowest Since 1982

By Simone Meier

Dec. 18 (Bloomberg) -- German business confidence dropped to the lowest in more than a quarter century in December as the credit crisis pushes Europe’s largest economy deeper into a recession.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, fell to 82.6 from 85.8 in the previous month. That’s the lowest reading for Ifo’s main index since November 1982. Economists expected a drop to 84, the median of 39 forecasts in a Bloomberg News survey shows.

Germany’s economy is on course for its worst contraction since 1993 next year as a global slowdown saps export demand, forcing companies to curb spending and hiring. Daimler AG, the world’s biggest maker of heavy trucks, said the recession may be “deep” and the European Central Bank this month cut its key interest rate by the most on record to stem the slump.

“The indicator points to a heavy recession,” said Heinrich Bayer, an economist at Deutsche Postbank AG in Frankfurt, who correctly forecast the Ifo outcome. “We need stimulating effects through further rate cuts and fiscal impulses as soon as possible, ideally internationally.”

This month’s reading is the lowest since data for a reunified Germany was first compiled in 1991. A subindex measuring executives’ assessment of current conditions fell to 88.8 from 94.9 in December. A gauge of expectations slipped to 76.8 from 77.6.

‘Pretty Poor’

“The results are pretty poor,” Ifo economist Gernot Nerb said. “Expectations come down but only a little bit. It is the current conditions that plunged.”

Germany’s economy is likely to shrink for a third straight quarter in the three months through December and will contract 0.8 percent next year, its worst performance since 1993, the Bundesbank says. The Ifo institute said on Dec. 11 that it expects the German economy to shrink 2.2 percent in 2009.

German manufacturing contracted for a fifth straight month in December and exports declined 0.5 percent in October.

Volkswagen AG, Europe’s largest carmaker, said on Dec. 9 it may struggle to reach growth objectives for 2010 on waning sales. Daimler said a slump in the commercial-vehicle market may continue into 2010.

“The financial crisis and economic slowdown” have already “significantly weakened demand in all of our target markets,” said Peter Bauer, chief executive officer of Infineon Technologies AG, Europe’s No. 2 maker of semiconductors.

Weaker Dollar

The euro is also strengthening against the dollar, reversing a slide of as much as 20 percent earlier this year, making business even harder for German exporters. The currency climbed by a record 3.1 percent yesterday as near-zero U.S. interest rates led traders to abandon the dollar.

The currency rose as much as 2.1 percent today and was at $1.4623 as of 11:01 a.m. after ECB Executive Board member Juergen Stark said that central banks have to be alert not to create the basis for a future crisis through low-rate policies.

“As soon as the current crisis is over, governments and central banks need to change to a restrictive course,” Stark told Germany’s Manager Magazin in an interview published today. “The time of very cheap money can’t and shouldn’t last forever.”

Stimulus Plan

The ECB and German Chancellor Angela Merkel are trying to limit the scale of the recession. Merkel said on Dec. 16 her government needs to adopt more stimulus measures to help the economy after already agreeing a package including construction investment and tax relief costing 32 billion euros ($45 billion) over two years.

Central banks around the world are also cutting borrowing costs to contain the fallout from the financial crisis. The ECB on Dec. 4 cut its key rate by 75 basis points to 2.5 percent and investors are betting on another reduction in January. The Federal Reserve lowered its key rate on Dec. 16 to between zero and 0.25 percent from 1 percent previously.

Still, ECB President Jean-Claude Trichet said on Dec. 15 that there’s a limit to how far the bank can cut borrowing costs. The Frankfurt-based central bank wants to “ensure that the 175 basis-point decrease that we have already decided is effective,” he said.

“The current downturn could behave like a rock that threatens to roll down a hill,” Carsten Brzeski, an economist at ING Group in Brussels, said in an e-mailed note today. “Once the boulder has gained momentum, it will simply mow down everything in its path. It should be stopped in time.”

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net