(RTTNews) - German business confidence dropped to a new low in December as the economy slipped into recession amid the global economic slowdown.

Thursday, the Munich-based Ifo Institute for Economic Research announced that Germany’s business climate index dropped to 82.6 in December from 85.8 in November. The December reading came in well below 84 as expected by economists.

“A similarly low level of the business climate index was last reached during the second oil crisis at the end of 1982″, the Ifo said. This was also the lowest reading since the German reunification in 1990. The Ifo Business Climate Index is based on 7,000 monthly survey responses of firms in manufacturing, construction, wholesaling and retailing.

The decline in the headline index was largely due to the deterioration in the current assessment of the economy. The current assessment index plummeted to 88.8 from 94.9 in November, much lower than economists’ consensus of 90.8. The expectations index dropped to 76.8 in December from 77.6, below economists’ forecast of 77.

The German had its economy slipped into a recession from the middle of 2008. Earlier in the month, the Ifo had forecast that the economy would shrink 3.5% on an annual basis in the fourth quarter. For the full year 2008, the economy was expected to grow 1.5%, slowing from the 2.5% expansion recorded in 2007. The economy is expected to contract 2.2% in 2009.

In the third quarter, Eurozone slipped into recession for the first time since the adoption of Euro, while Germany, the largest economy in the group, entered a recession for the first time in five years. According to analysts, Germany is in the grip of the worst recession since the end of Second World War.

The country’s central bank the Bundesbank had forecast that the nation’s economy would contract by 0.8% next year. The bank predicted 1.2% growth for 2010. The German government had slashed its economic growth forecast for 2009 to 0.2% from 1.2%. At the same time, the government maintained its outlook for 2008 at 1.7%.

Earlier in the month, both houses of the German parliament passed the EUR32 billion or $41 billion economic stimulus plan of Chancellor Angela Merkel. The funds would be channeled into investments and contracts over the next two years.

With the increasingly deteriorating domestic as well as global economic outlook, German businesses have scaled down production and investment plans. Deutsche Bank Research predicted a 2.5% fall in production for next year. The research group expects production to decline in the car industry, mechanical engineering, electrical engineering and the chemicals industry.

A stronger Euro is hurting exports, a key driver for the German economy. The currency may strengthen further on expectations of less number of rate cuts in Europe.

It has been a year of rate cuts. As economic slowdown gained steam amid the global financial crisis, central banks across the world aggressively axed interest rates. While the U.S. Federal Reserve took rates to near zero this week, the European Central Bank made its biggest ever rate cut in December, taking the key rate to 2.5%.

However, the trend may come to a halt early next year. While speaking to reporters in Frankfurt on Monday, the ECB chief Jean- Claude Trichet hinted that policymakers may pause in January.

Commerzbank Chief Economist Joerg Kraemer said in note, “The ECB can be expected to cut its key interest rate to below 2% in the first quarter of next year, even though at present it is evidently reluctant to do so”. Citing the latest Ifo data, the economist said it seems German GDP shrunk sharply in the final quarter of the year, down 2%.

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