March 17, 2020 / 10:32 AM / 23 days ago

Coronavirus puts German economy on 'red alert'

BERLIN (Reuters) - The mood among German investors slumped in March to levels last seen at the beginning of the world financial crisis in autumn 2008 due to alarm at the impact of the coronavirus outbreak on Europe’s largest economy, a survey showed on Tuesday.

The ZEW research institute’s monthly survey showed economic sentiment among investors collapsed to -49.5 from 8.7 in February. This was the biggest drop since the survey began in 1991. Economists had expected a drop to -26.4.

“The economy is on red alert,” said ZEW President Achim Wambach in a statement, adding that financial experts expect the economy to shrink in the first quarter and think a contraction is also very likely in the second quarter.

A separate gauge measuring investors’ assessment of the economy’s current conditions decreased to -43.1 from -15.7. Analysts had forecast a reading of -30.0.

For 2020 as a whole, most investors currently expect a decline in real GDP growth of about 1% as a result of the pandemic, Wambach said.

The spread of the coronavirus has ended hopes of a first-quarter upswing on the back of a solid increase in retail sales and a jump in industrial production in January.

But with the coronavirus infecting a growing number of people and leading to unprecedented measures to slow its spread, officials said the government now expects gross domestic product to shrink this year, in what would be the first contraction since the world financial crisis in 2009.

Volkswagen (VOWG_p.DE) said on Monday it was preparing to shut down its factories to curb the spread of the coronavirus and warned that 2020 would be a very difficult year.

The slump is expected to drive down tax revenues while also requiring a massive increase in state spending to help companies and save jobs.

POLICY SUPPORT

Jack Allen-Reynolds from Capital Economics said the ZEW survey pointed to a large decline in GDP.

“Things are likely to get much worse in Q2, when we expect much bigger quarterly falls in GDP than during the depths of the global financial crisis,” he added.

The ZEW figures suggested that the German economy could shrink by as much as 4% on the year in 2020, he said. “So a considerable amount of additional policy support from the ECB and governments will be necessary.”

Chancellor Angela Merkel has vowed to do everything necessary to slow the spread of the coronavirus and counter its impact on the economy, saying that the pledge of not taking on new debt was now secondary.

The federal government has budget reserves of more than 48 billion euros ($53 billion) and could raise up to 35 billion euros of new debt if Berlin decided to ditch its balanced budget goal in the course of the year.

In addition, the Federal Labour Office has reserves of 26 billion euros that can be used to help firms through short-time working schemes. The public health system has reserves of nearly 20 billion euros.

Finance Minister Olaf Scholz and Economy Minister Peter Altmaier on Friday promised half a trillion euros in guarantees for business - and more if needed - to tackle the economic impact of the epidemic.

The finance ministry is mulling an emergency fund aimed at helping small- and medium-sized companies.

Once the virus is contained and economic life resumes, the government is ready boost the economy with fiscal measures, Scholz told Handelsblatt business daily, adding: “We should then coordinate such stimulus programs in Europe.”

Altmaier told broadcaster RTL that he expected the coronavirus crisis to last until the end of May, with a “considerable number of new infections”.

Reporting by Madeline Chambers and Michael Nienaber; Editing by Thomas Escritt and Giles Elgood

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