Demand for German goods keeps factories humming through lockdown

[March 26, 2021]  BERLIN (Reuters) - Business morale in Germany is higher this month than it has been in almost two years, as rising demand for manufactured goods keeps factories in Europe's largest economy humming despite the pandemic and lockdown restrictions, a survey showed on Friday.

The Ifo institute said its business climate index shot up to 96.6, the highest reading since June 2019, from an upwardly revised 92.7 in February. A Reuters poll of analysts had pointed to a March reading of 93.2.

"Despite rising infection numbers, the German economy started spring with confidence," said Ifo President Clemens Fuest. "Companies were noticeably satisfied with their current condition."

The survey added to signs that the economy is navigating through the pandemic relatively unscathed in an election year marked by rising discontent with Chancellor Angela Merkel's handling of lockdowns and a slow vaccination campaign.

Ifo said "exploding" demand for German goods from the United States and China pointed to an upswing in the industrial sector, where optimism was at its highest level since November 2010.

The survey also found that the services sector, which had been hit harder by lockdown measures in place since November, was also showing initial signs of a recovery.

Ifo economist Klaus Wohlrabe said the institute expected a 0.7% contraction in the third quarter, suggesting that the economy would return to solid growth once the services sector, which makes up just under 70% of output, recovers.

'NICE SURPRISE'

Germany is struggling to contain a second wave of the coronavirus that has in recent weeks morphed into a third, forcing an extension of lockdown measures until April 18.

Merkel was criticised this week for causing confusion by reversing a decision for an extended Easter holiday designed as a circuit-breaker.

"This nice surprise is in contrast to the chaos of the corona-fighting measures of the last few days," said Uwe Burkert, chief economist at LBBW. "It is rooted in the global recovery and the prospect of successful vaccination."

Merkel's government unleashed a massive stimulus plan last year to keep businesses afloat and avoid mass layoffs during the crisis. The chancellor said this week the sluggish vaccination campaign should start gaining steam in April when shots are expected to become available in larger quantities.

"We still expect the government to lift most restrictions around the middle of the year, once roughly half of the adult population has been vaccinated," said Andrew Kenningham, chief Europe economist at Capital Economics.

"If so, the economy should recover from the third quarter on. And Germany should still be the first of the large euro zone economies to regain its pre-pandemic level of activity, perhaps by early 2022."

(Writing by Joseph Nasr; Editing by Paul Carrel and Hugh Lawson)

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