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German Business Braces Itself as Confidence Plunges

German business sentiment dropped more than expected in December, hitting a record low after plunging for seven straight months. With business slumping, Europe's largest economy is bracing itself for a tough year.

Finance Minister Peer Steinbruck rubbing his eye

Though not unexpected, the record drop has some rubbing their eyes in wonder

With the global economic downturn gaining momentum, the closely-watched Ifo business confidence index marked the end of the year by chalking up its seventh consecutive monthly fall, declining to 82.6 points.

"December's fall in the German Ifo business climate index brings further evidence that, far from weathering the storm, the German economy is in the midst of it," Capital Economics economist Jennifer McKeown told the AFP news agency.

Analysts had expected the index, which is drawn up by the Munich-based economic institute, would fall to 84 points after it plunged more than expected in November to 85.8 points. The index stood at 90.2 points in October.

A sub-index of the Ifo survey was much lower at 88.8 points, compared with 94.9 in October, while expectations for the next six months also hit a record low of 76.8 points from 77.6 points, the institute said.

"The dominant feature of the December decline is the worsening of the firms' current business situation," said Ifo President Hans-Werner Sinn in a statement.

Downturn expected to affect labor market

Considered the most accurate measure of German business confidence, the survey of 7,000 German executives comes in the wake of the publication of a slew of major indicators and data underscoring the bleak economic outlook taking shape across Europe.

On Tuesday, a euro-zone purchasing managers' index (PMI) for December compiled by data and research group Markit fell to 38.3 points, its lowest level in the survey's 10-year history.

Image of a waiting room with empty chairs at an unemployment office

Chairs at unemployment offices across Germany may soon be filling up again

"The downturn is affecting above all the manufacturers of export and capital goods and less, up until now, retailing and construction," Sinn added. "The pessimistic expectations of past months are becoming reality as more and more of the firms report an unsatisfactory business situation."

Ifo said in its report that the auto and chemical sectors in the world's leading exporter have been especially hard hit by the global economic slowdown. Companies have likewise reported that they expect to shed workers, halting a steady fall in German unemployment rates.

"On the whole the economic downturn has worsened and will now have an impact on the labor market," the report said.

"Little light at the end of the tunnel"

Germany might see economic activity contract by up to 3.0 percent next year, which would mark the worst recession in its post-war history, Deputy Economy Minister Walther Otremba told AFP on Wednesday.

"With the (Ifo) expectations index still at a record low, there is little light at the end of the tunnel," McKeown said. "In all, it still looks likely that German GDP will fall by at least 1.0 percent next year and the latest forecast from the Ifo institute itself of a fall of about 2.0 percent might not be too far off the mark."

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