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German Ifo Business Confidence Plunges On War In Ukraine

Germany’s business sentiment declined sharply in March as expectations logged a record collapse amid the war in Ukraine, survey results from the ifo Institute showed on Friday.

The business climate index dropped to 90.8 in March from a five-month high of 98.5 in February. This was the lowest since July 2020, when the score was 89.7. The score was forecast to fall moderately to 90.8.

This sharp fall was driven by a record decrease of 13.3 points in expectations, which was even more than it fell at the outbreak of the coronavirus crisis in March 2020. The corresponding index came in at 97.0.

Businesses also assessed their current situation as worse, but the fall was comparatively moderate. The current situation index dropped to 97.0 in March from 98.6 in the previous month.

In manufacturing, the business climate index declined as companies’ expectations registered a record drop, flipping from optimism to pronounced pessimism. Their assessments of the current situation were also lower.

In the service sector, too, the business climate worsened notably. This was due to a conspicuous drop in expectations. In contrast, service providers left their assessments of the current situation practically unchanged.

The business confidence crashed in trade as well. The expectations indicator registered a record collapse. At the same time, assessments of the current situation were almost unchanged in March.

In construction, the business climate deteriorated significantly in March. This, too, was driven by considerably more pessimistic expectations. Assessments of the current situation also worsened, but a majority of construction companies were still satisfied with their current business.

The economy will probably expand in the first quarter as a result of the lifting of Covid restrictions, but downside risks have clearly risen and a contraction in manufacturing output is likely to begin in March or April, Andrew Kenningham, an economist at Capital Economics, said.

Early this week, the ifo Institute forecast the German economy to grow between 2.2 percent and 3.1 percent this year. This was slower than the 3.7 percent projected in December.

The institute said the escalation of the Russian-Ukrainian conflict and the outbreak of war changed the economic situation in Germany as well.

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