German business sentiment deteriorates in January

German business sentiment deteriorated in January as the second wave of the Covid-19 pandemic took its toll, according to a survey released on Monday by the Ifo Institute.

The business climate index fell to 90.1 from 92.2 in December, missing expectations for a reading of 91.4 and reaching its lowest level since June 2020.

The current situation index declined to 89.2 from 91.3, while the expectations gauge printed at 91.1 in January compared to 93.0 the month before.

Ifo president Clement Fuest said: "Companies assessed their current situation as worse than last month. Their expectations were also more pessimistic. The second wave of coronavirus has brought the recovery of the German economy to a halt for now."

ING said the Ifo index shows the full impact of the stricter lockdown measures put in place in mid-December, signalling a very weak start to the new year for the German economy.

Analyst Carsten Brzeski said: "We will only know for sure on Friday, but there is compelling evidence that the German economy avoided a double dip in the fourth quarter. A strong manufacturing sector, strong construction activity and exports should have helped to avoid an economic contraction. The fact that the lockdown measures until mid-December were relatively light should have brought some relief as well.

"Looking ahead, however, the stricter lockdown since mid-December will clearly leave its mark on the German economy in the first quarter. The closing of schools and its indirect impact on worked hours and productivity should weigh on economic activity. Also, the reversal of UK stockpiling in 4Q as well as ongoing lockdowns in many other neighbouring countries does not bode well for exports going forward.

"However, the biggest difference with the economic impact from the lockdown measures in the second quarter of last year is that industrial activity continues. Last spring, many factories closed voluntarily as supply chains were disrupted. With this in mind, another lockdown in China would be a very unwelcome black swan for the German economy."