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Preview: German IFO Paints a Depressing Picture

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The only notable data for the European markets comes in the form of the German Final IFO Business Climate. And it is likely to make an impact on the euro!

According to the latest figures, sentiment among German businesses has been deteriorating at an alarming rate. Only last month, we saw the biggest drop since Aug 2009. The index fell from 96.0 to 87.7.

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The slump in business expectations was also the quickest in 70 years of industry surveys, the IFO said. The service sector was also hit hard. In addition, the business climate indicator registered its lowest ever reading.

Right now, the companies surveyed remain pessimistic, with expectations of further weakening due to coronavirus. Therefore, the situation is likely to worsen for the economy as a whole.

Estimated Economic Impact of the COVID-19 Pandemic

The coronavirus crisis could cost the German economy between €255bn and €729bn in 2020, the IFO economic institute said earlier this week. In a statement, President Clemens Fuest said:

“The costs will probably exceed everything known from economic crises or natural disasters in Germany in recent decades.”

Economic indicators are backing the statement and pointing to a recession. This is true not only for Germany but for the euro area as a whole… That’s if we’re not already in one.

How much damage is suffered by most economies will depend on the duration of the crisis and lockdown.

Economists are expecting that the economy could shrink anywhere between 7.1% and 20.6% in 2020. This will have a direct impact on the country’s GDP, which could suffer a drop of between 0.7% and 1.6%.

What has the German Response Been so far?

The German government has decided to take stern measures to stop the spread of the virus. This includes a partial lockdown on sectors like restaurants, bars, and cafes.

We can, therefore, expect the labor market to dwindle considerably. About 1.8 million jobs could be cut, and these people are subject to social insurance contributions.

Given the situation, on Monday, Finance minister Olaf Scholz announced that €356bn of aid would be provided to support struggling businesses. This amounts to around 10% of Germany’s GDP!

Any Benefits from the Lockdown?

With manufacturing deep in recession and likely to remain there for a while, Germany might reach target greenhouse gas emissions (GHG). They target a 40% drop by the end of the year.

The notable slowdown in industrial activities and transportation are leading to lower gas emissions, perhaps it is the only healthier change the pandemic has resulted in.

With the recent lockdown in mind, Germany will meet the desired target.

Where time is of critical importance, is when this crisis starts deteriorating.

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