German business confidence fell to a 26-year low in March, adding to evidence that the recession in Europe’s biggest economy is getting worse. The Ifo institute, at the University of Munich, said today, that its business climate index, dropped to 82.1 from 82.6 in February.

The German economy will shrink 6% to 7% this year, Commerzbank forecast on Monday - - an outcome that would put the country in the deepest recession of any major European economy this year

The German government currently forecasts that 2009 gross domestic product will fall only 2.25%. But the deluge of gloomy data from German industry is prompting more analysts to cut expectations, adding fuel to the debate over whether the country should adopt a more aggressive fiscal-stimulus policy.

The Ifo institute, said today, that its Business Climate for industry and trade in Germany has cooled again somewhat in March. The firms have reported a further worsening of their current business situation. With regard to the business outlook for the coming six months, they are again slightly less pessimistic.

However, the firms do not expect a significant improvement in their business situation. An economic turning point has not yet been reached, in the opinion of the survey participants.

In manufacturing the business climate remains largely unchanged. Behind this stable business climate are two countervailing factors. The survey participants are even more dissatisfied with their current business situation than in the previous month, but they are less negative in their business expectations.

With regard to foreign business, the exporting firms are more pessimistic than they were in February. Even more manufacturing firms plan to reduce staff numbers.

In wholesaling the business situation has worsened again in March, and the firms are also more pessimistic regarding the six-month outlook. As a result, the business climate has cooled further. The business climate also worsened in retailing. The retailers have given more reserved assessments of both their current business situation as well as the business outlook for the coming half year. In contrast, firms in construction have given more favourable assessments of their current business situation and their business outlook. Here, the business climate has improved.

The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as “good”, “satisfactorily” or “poor” and their business expectations for the next six months as “more favourable”, “unchanged” or “more unfavourable”. The balance value of the current business situation is the difference of the percentages of the responses “good” and “poor”; the balance value of the expectations is the difference of the percentages of the responses “more favourable” and “more unfavourable”. The business climate is a transformed mean of the balances of the business situation and the expectations.  For calculating the index values the transformed balances are all normalised to the average of the year 2000.

Business Climate in the Services Worsens Further