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German business confidence fell to the lowest level in more than 26 years in March, adding to signs that the recession is deepening.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 82.1 from 82.6 in February. That’s the worst reading since November 1982. Economists expected a decline to 82.2, according to the median of 37 forecasts in a News survey.

A global slump in demand has forced German companies to scale back production and cut jobs, pushing the economy into its worst recession since World War II. Metro AG, Germany’s largest retailer, yesterday reported an unexpected drop in fourth- quarter profit as consumers pared spending. Commerzbank AG expects gross domestic product to decline as much as 7 percent this year.

“These data are a reminder of just how bad conditions are in Europe’s largest economy and put paid to any thoughts of a swift rebound in activity,” said Colin Ellis, European economist at Daiwa Securities SMBC Europe Ltd. in London. “We have not reached the bottom yet, by any means.”

European government bonds erased declines after today’s report. The yield on the German two-year note fell one basis point to 1.38 percent by 9:07 a.m. in London. The euro was little changed at $1.3462.

‘Tender Green Shoot’

Ifo’s gauge of current conditions declined to 82.7 from 84.3. Still, the measure of expectations increased to 81.6 from 80.9.

“The Ifo’s absolute level is still depressingly low,” said Carsten Brzeski, an economist at ING Group in Brussels. “Nevertheless, the gradual improvement of the Ifo’s expectation component is at least a tender green shoot of stabilization.”

The European Central Bank has signaled it’s ready to lower its key interest rate further from a record low of 1.5 percent. Chancellor Angela Merkel’s coalition also plans to spend about 82 billion euros ($110 billion) to stimulate growth, including tax breaks and investment in infrastructure.

Ifo economist Gernot Nerb said in an interview with Bloomberg Television today that it’s “too early” for government measures to have an impact on the economy payday advance. He also called on the ECB to lower its key rate by a full percentage point when policy makers next meet on April 2.

‘Chain Reaction’

The global economic crisis has exposed Germany’s reliance on exports as an Achilles Heel. German exports dropped for a fourth month in January, manufacturing orders plunged 38 percent from a year earlier and industrial output declined the most on record.

Volkswagen AG Chief Executive Officer Martin Winterkorn said on March 12 that 2009 “will be one of the most difficult years” in the company’s history. ThyssenKrupp AG, Germany’s biggest steelmaker, on March 19 forecast its first quarterly loss in three years and said it may cut more than 3,000 jobs.

This year will be a “big challenge,” Wolfgang Reitzle, CEO of Linde AG, the world’s second-largest maker of industrial gases, said on March 16. “A certain chain reaction has been generated that we feel too.”

German Economy Minister Karl-Theodor zu Guttenberg said last month that while most indicators are “definitely very negative,” others offer “hope” that the economy could begin to turn around before 2010.

‘Good Start’

German investor confidence unexpectedly rose to the highest level in almost two years in March and the country’s benchmark DAX share index has gained about 13 percent this month. In neighboring Belgium, business confidence increased in March, the central bank said yesterday.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday Germany’s largest bank had a “good start” to the year. In 2010, “some degree of recovery in the banking industry is foreseeable,” he said.

The RWI institute said on March 23 it expects the German economy to expand 0.5 percent in 2010.

“We can see some light at the end of the tunnel but it’s too early to give the all clear,” said Tobias Basse, an economist at Norddeutsche Landesbank in Hanover. “The current difficult situation will persist for a while.”

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