German manufacturing expectations record fastest-ever plunge

The coronavirus outbreak caused the steepest drop in German manufacturers' expectations in the 70-year history of surveys, data showed on Thursday, as the three main economic institutes predicted anything from mild recession to a generational crash. The grim outlook and the rapid spread of the virus are pushing Chancellor Angela Merkel's government to use an exception to the debt brake enshrined in its constitution, an official with knowledge of the plan told Reuters.

"The German economy is speeding into recession," said Clemens Fuest, president of the Ifo institute, which published preliminary results of its monthly survey for March. A fall in Ifo's overall business climate index to 87.7 from 96.0 in February, the biggest drop since 1991, brought the index to its lowest level since the 2009 recession, Fuest said.

Of the plunge in manufacturing business morale, he said: "Never in the history of a reunified Germany has it fallen so far. The drop in expectations is the single most precipitous in 70 years of industry surveys." Germany's three main economic institutes all published revised forecasts predicting that Europe's largest economy would shrink this year, with outlooks that ranged from a mild contraction to a historic crash wiping out 9% of GDP.

In what it described as an optimistic scenario, Ifo predicted the German economy would shrink by at least 1.5% this year. A second scenario would see a contraction of 6%. Another institute, the IfW, said gross domestic product would shrink between 4.5% and 9%.

A third, DIW, predicted a smaller fall of just 0.1% but said this was based on an optimistic V-shaped scenario in which a sharp drop would be followed by a quick rebound, and the recession could be much more severe if uncertainty persists. Many German car manufacturers and suppliers, including Volkswagen and BMW, have announced factory closures due to the rapid spread of the coronavirus and supply chain problems.

The preliminary Ifo figures are based on roughly 90% of the usual number of responses. The institute will publish the final figures on March 25. The survey was conducted from March 2-18. CULTURAL SHIFT

Both Ifo and DIW called on the government to counter the impact of the coronavirus crisis with a big fiscal splurge, adding that Berlin should consider measures to also help small businesses and the self-employed. Chancellor Angela Merkel has promised to do "whatever it takes" to counter the epidemic's economic impact. The government has pledged an initial half a trillion euros in liquidity guarantees for affected businesses.

Such measures would mark a cultural shift for Germany, which advocated fiscal prudence in Europe during the eurozone debt crisis that followed the 2008-2009 recession. Government sources told Reuters on Thursday that Germany was planning a 40 billion-euro ($43.27 billion) package to help small businesses and the self-employed threatened with bankruptcy by the coronavirus crisis.

Ministers have not signed off on the rescue package, which could yet exceed 40 billion euros, one of the sources said, adding that the government would pay operating costs of struggling businesses such as rents and leasing fees. To finance the package, Germany plans to declare an exception to the debt brake enshrined in its constitution, another official with knowledge of the plan said on Thursday.

The decision, expected to be formalized during a cabinet meeting on Monday, means that the government will take on new debt this year for the first time since 2013, the official added. Under the German debt brake rule, Berlin is allowed to take on new debt of up to 0.35% of economic output. But it can go beyond that if the country is hit by a natural disaster or "exceptional emergencies" that are beyond state control and significantly affect the state's financial situation.

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