The German economy contracted by a record 9.7% in the second quarter as consumer spending, company investments and exports all collapsed at the height of the Covid-19 pandemic, the statistics office said today. 

The economic slump was much stronger than during the financial crisis more than a decade ago. 

It also represented the sharpest decline since Germany began to record quarterly GDP calculations in 1970, the office said. 

But the reading still marked a minor upward revision from an earlier estimate for the three months from April to June of -10.1% that the office had published last month. 

German consumer spending shrank by 10.9% on the quarter, capital investments by 19.6% and exports by 20.3%, seasonally adjusted data showed. 

Construction activity, normally a consistent growth driver for the German economy, fell by 4.2% on the quarter. 

"The second quarter was a complete disaster," VP Bank economist Thomas Gitzel said. "Regardless of whether it is about investments, private consumption, exports or even imports -everything was in free fall." 

The only bright spot was state consumption, which rose by 1.5% on the quarter due to the government's coronavirus rescue programmes, the office said. 

The German parliament has suspended the debt brake this year to allow the government to finance its crisis response and fiscal stimulus push with record new debt of €217.8 billion. 

The fiscal U-turn after years of balanced budgets means that the German state recorded a budget deficit of €51.6 billion from January to June, the statistics office said in a separate statement. 

That represents a deficit of 3.2% of economic output as measured by the EU's Maastricht criteria. 

Employment edged down by 1.3% on the year to 44.7 million in as sign that the government's efforts to shield the labour market from the coronavirus shock with its short-time work programme are paying off. 

The relatively mild impact of the crisis on employment helped to stabilise income for many households, which together with the reluctance to consume, led to a considerable increase in household saving. 

The savings rate almost doubled to 20.1% in the 2nd quarter compared to the previous year, the office said. 

The German central bank expects household spending to drive a strong recovery in the third quarter, though the economy might not reach its pre-crisis level before 2022. 

The government's stimulus measures include a temporary VAT cut from July to December worth up to €20 billion, which Berlin hopes will give household spending an additional push.

Meanwhile, German business morale improved more than expected in August as both manufacturing and services picked up steam, a separate survey showed today, boosting hopes that Europe's largest economy is set for a strong recovery following the massive coronavirus shock. 

The Ifo institute said its business climate index rose to 92.6 from a downwardly revised 90.4 in July. This was the fourth monthly increase in a row and came in better than economists' expectations for 92.2. 

"The German economy is on the road to recovery," Ifo President Clemens Fuest said in a statement, adding that firms assessed their current business situation much more optimistically than in the previous month. 

The Ifo survey recorded the strongest gains in business morale among manufacturers and service providers while sentiment among construction firms was also improving further. 

Ifo economist Klaus Wohlrabe said he expected the economy to grow by almost 7% on the quarter in the three months from July to September after it posted a record plunge of 9.7% in the previous three months at the height of the pandemic. 

"The upswing is still fragile. We have not yet reached the pre-crisis level," Wohlrabe told Reuters, adding that the latest spike in new infections underlined the risk of a second wave which could derail the recovery again. 

But Wohlrabe also pointed out that export expectations had fallen again slightly as doing business abroad remained difficult for many German companies. 

"In view of the fragile situation in other European countries, the German export industry is doing relatively well," he said.