LONDON (ICIS)--Germany’s business confidence index, compiled by the ifo Institute, declined in January as the country’s lockdown is “unlikely to end” on 14 February as planned, financial analysts said on Monday.
The pandemic’s second wave has hit Germany hard, and the country’s health services have been under pressure since December; unlike in the spring of 2020, Germany’s death toll has surpassed 1,000 on several days in January this year.
January’s economic performance was hit by the lockdown, with falls in practically all economic sectors – including manufacturing, construction, trade, and services – although the fall in confidence during the month is far from the lows posted in the second quarter of 2020.
LOWEST SINCE JUNE
The overall ifo Business Climate Index fell from 92.2 points in December 2020 to 90.1 points in January 2021, its lowest level since June 2020 when the German economy was coming out of the spring lockdown.
“Companies assessed their current situation as worse than last month. Their expectations were also more pessimistic. The second wave of coronavirus has brought the recovery of the German economy to a halt for now,” said ifo.
In the key petrochemicals-intensive manufacturing sectors, the ifo index fell in January after eight consecutive rises.
“This was due to notably less optimistic expectations among manufacturing companies. In contrast, assessments of the current situation were considerably better,” said ifo.
“Capacity utilisation rose by 1.6 percentage points to 81.8%, but is still lower than its long-term average of 83.5%.”
‘FEAR IS BACK’
As the epidemiological situation worsens and the vaccine roll-out in most EU countries is not as speedy as expected, the economic outlook is also turning sombre.
Analysts at investment bank ING said “fear is back” among companies and analysts that the pandemic’s economic effects could last longer than anticipated.
“The stricter lockdown since mid-December will clearly leave its mark on the German economy in the first quarter. The closing of schools and its indirect impact on worked hours and productivity should weigh on economic activity,” said ING.
“Also, the reversal of UK stockpiling in Q4 as well as ongoing lockdowns in many other neighbouring countries does not bode well for exports going forward.”
In line with fears that some parts of China may also go into lockdown as the country has confirmed several coronavirus positive cases transmitted locally, the export-intensive German economy could also take a hit.
Germany’s coronavirus cases remain stubbornly high, and London-based analysts at Deutsche Bank (DB) took for granted on Monday that the current lockdown is likely to be extended beyond 14 February to save health services from being overloaded.
According to DB, the ifo index for January was lower than expected, and a “negative surprise”, which could compound negative sentiment, also fuelled by the “stuttering start of the vaccination” campaign in Germany.
However, the German investment bank fell short of any downgrade to its GDP forecast for Germany in 2021 as the economy could still pick up later in the year.
“German Q1 GDP now looks likely to fall by at least 1% quarter on quarter, assuming that the restrictions for retail and services will only be gradually lifted after 14 February,” said DB.
“Hence, our 4.5% forecast [for GDP growth] for the year as a whole looks somewhat ambitious, but given the overall uncertainty we currently see no real need to lower it.”
Oxford Economics analysts expect German GDP to fall by 0.5% in the first quarter, however, although they said that forecast may need to be downgraded if the lockdown is extended beyond mid-February.
“The near-term outlook remains clouded by the containment measures and the continuing spread of the virus. For now, the lockdown has been extended until mid-February, but we remain sceptical of an easing directly afterwards,” said Oxford Economics.
As the restrictions will weigh on both output and employment in the coming months, we see GDP contracting by 0.5% q/q in the first quarter of the year with further downward revisions likely in the next forecast round.