German business confidence deteriorated to a historical low in March as other economic indicators point to a deepening recession in the economy, a closely watched survey showed Wednesday.

According to a monthly survey from the Munich-based Ifo Institute for Economic Research, business confidence in the largest Eurozone economy cooled further to 82.1 in March from 82.6 in February. This was the lowest reading since the survey began in 1991. The expected level for March was 82.2.

The Ifo Business Climate Index is based on 7,000 monthly survey responses of firms engaged in manufacturing, construction, wholesaling and retailing.

Confidence amongst all types of survey participants, except contractors weakened in March. Business climate remained largely unchanged in manufacturing because of two countervailing factors. Respondents were more dissatisfied with their current situation, while they were less negative in their future expectations.

Meanwhile, the index measuring current situation worsened to 82.7 in March from 84.3 last month. However, the index stood above the expected reading of 82.5.

Wholesalers and retailers assessed that their current business situation worsened again in March. At the same time, firms in construction gave more favorable assessments of their business situation.

On the other hand, the expectations index rose to 81.6 from 80.9 last month. Consensus forecast for March was 81.5. Firms do not expect a significant improvement in their business situation.

Firms engaged in wholesaling were more pessimistic regarding the six-month outlook, while retailers gave more reserved assessments for business outlook. Business expectations improved in the construction sector.

After recovering slightly in the previous two months, the Ifo Business Climate indicator in the service sector dropped in March. The index stood at minus 10 in March versus minus 6.5 in the previous month. Business expectations as well as current assessment weakened in March.

In the fourth quarter of 2008, the German economy experienced the biggest sequential contraction since the reunification in 1990 on plunging exports. Yesterday, a German daily reported that the government downwardly revised GDP estimate for the year 2009. The government now forecasts the economy to contract in the range of 4% to 4.5% this year.

At the same time, research institute like Essen-based RWI lowered GDP forecasts, saying the GDP will fall 4.3% in 2009 compared to a 2% decline estimated in December. Meanwhile, the think tank IMK reportedly estimated real GDP to fall 5% in 2009.

Jörg Krämer, Chief Economist at Commerzbank expects the European Central Bank to reduce the key interest rate by 50 basis points to 1% next week and the deposit rate will probably be reduced to 0.25%. The overnight rate will be close to the deposit rate as the central bank will offer banks with liquidity on an unlimited scale against collateral well into next year. This would effectively means that the central bank will be pursuing a zero interest rate policy as of next week.

Commenting on the business confidence report, the economist said the freefall of this key early indicator appears to be coming to a halt, supporting the forecast that, after a miserable first quarter, the German economy will contract at least less sharply in the second quarter.

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