German business morale rebounds, survey finds; state spending key to recovery

Berlin

THE German economy is starting to recover as curbs to slow the coronavirus are lifted, a business morale survey showed on Monday, and separate output data pointed to the importance of government spending to support the recovery.

Business morale in Europe's largest economy rebounded in May, the Ifo economic institute said, recovering from its worst decline on record in April as a reopening of the economy boosted expectations among companies.

Separate data from the Federal Statistics office gave an indication of the damage caused by restrictions to stop the spread of the virus, which pushed the economy into its steepest contraction since 2009 in the first quarter.

A decline in capital investments, private consumption and exports contributed to the 2.2 per cent slump. Ifo said it expects a double-digit dip in the second quarter when the full impact of the restrictions introduced in mid-March becomes more visible.

Healthy construction and higher state spending were the only bright spots in the otherwise grim data; together, they prevented a deeper contraction. Government spending rose by 0.2 per cent on the quarter and construction grew by 4.1 per cent, the data showed.

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Chancellor Angela Merkel's government, which has approved an unprecedented 750 billion-euro (S$1.16 trillion) rescue package, is due next week to propose additional stimulus to sustain the recovery, which economists say will be slow and partly dependent on how fast Germany's euro zone trading partners return to normal.

"While (social and economic) activity slowed down to 60 per cent of its January level during the peak of the lockdown, it has now returned to more than 80 per cent," Carsten Brzeski, ING's chief economist for the euro zone, wrote in a note to clients.

"However, to offset the economic damage of the last two months, much more acceleration is needed. Therefore, it does not come as a surprise that the German government is currently preparing another fiscal stimulus package," he added. REUTERS