German investor morale crashes on coronavirus fears

The mood among German investors slumped in March to levels last seen in the 2008 financial crisis due to alarm at the impact of the coronavirus outbreak, a survey showed on Tuesday.

The ZEW research institute said its monthly survey showed economic sentiment among investors collapsed to -49.5 from 8.7 in February. Economists had expected a drop to -26.4.

"The economy is on red alert," said ZEW President Achim Wambach in a statement, adding that financial experts expect the economy to shrink in the first quarter and think a contraction is also very likely in the second quarter.

A separate gauge measuring investors' assessment of the economy's current conditions decreased to -43.1 from -15.7. Analysts had forecast a reading of -30.0. For 2020 as a whole, most investors are currently expecting a decline in real GDP growth of approximately 1 per cent as a result of the corona pandemic, Wambach said.

The spread of the coronavirus has ended hopes of a first-quarter upswing which had been driven by a solid increase in retail sales and a jump in industrial production in January.

But with the coronavirus infecting a growing number of people and leading to unprecedented safety measures to slow its spread, officials said the government now expects gross domestic product to shrink this year, in what would be the first contraction since the world financial crisis in 2009.

Volkswagen, the world's largest carmaker, said on Monday it was preparing to shut down its factories as a way to curb the spread of the coronavirus and warned that 2020 will be a very difficult year.

The slump is expected to push down tax revenues while at the same time requiring a massive increase in state spending to help companies bridge liquidity problems and shield workers from unemployment.

Jack Allen-Reynolds from Capital Economics said the ZEW survey pointed to a large decline in GDP.

"Things are likely to get much worse in Q2, when we expect much bigger quarterly falls in GDP than during the depths of the global financial crisis," he added.

The ZEW figures suggested that the German economy could shrink by as much as 4 per cent on the year in 2020, he said.

"So a considerable amount of additional policy support from the ECB and governments will be necessary."

Chancellor Angela Merkel has vowed to do everything necessary to slow the spread of the coronavirus and counter its impact on the economy, saying that the pledge of not taking on new debt was now secondary.