German Businesses Lose Faith in Recovery as Virus Spreads

(Bloomberg) -- German companies are turning pessimistic on the recovery, potentially marking the beginning of a major economic setback after half a year of gradual improvements.

The Ifo Institute’s business climate index dropped for the first time in six months, just as coronavirus cases in the country reached new records. The reading of 92.7 in October was lower than the median forecast of economists in a Bloomberg survey, and compares to 93.2 the previous month. A gauge of expectations also deteriorated.

“What’s worrying at the moment is really the rise in infections -- it’s unclear what could stop that, and that will have an impact on the recovery,” Ifo President Clemens Fuest said in a Bloomberg TV interview with Francine Lacqua and Tom Keene. “For Germany, we don’t see a double dip yet, but the risk is certainly rising.”

Local authorities have introduced a range of new restrictions and curfews after the pandemic made a strong resurgence this month. Chancellor Angela Merkel has promised to do all she can to prevent another lockdown similar to the one that hammered the economy in the second quarter, yet businesses are already feeling the strain.

Across Europe, governments are already imposing tougher measures, moving closer to the types of lockdowns seen in the initial wave of the virus. In the past few days, Spain announced a nationwide curfew and Italy introduced the strongest measures since May.

Germany’s services sector is shrinking again, according to a separate report on Friday, though continued strength in manufacturing is offsetting some of that weakness for now.

The Bundesbank warned Monday that the recent sharp rise in infections, coupled with expanded restrictions in some parts of the country, is likely to hit companies offering hospitality and catering services particularly badly. While the economy will likely continue to recover in the fourth quarter, it’ll do so at a “considerably slower” pace.

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