Germany
The German economy is facing a deep recession, with a decrease in GDP by 8.8% in 2020 if a second COVID-19 outbreak requires further containment measures or prolongs uncertainty. The fall in GDP is estimated at 6.6% if the virus subsides by the summer. Containment measures have been shorter and less stringent than in other major European economies, thanks to widespread testing and high health sector capacity. This has moderated the economic downturn, but uncertainty and reduced demand are still having a significant effect on business investment and exports in key sectors, in particular manufacturing. A second outbreak would undermine the benefits of an early and well-managed reopening. Increased uncertainty would underpin greater precautionary saving by consumers and weigh on investment at home and abroad, with negative consequences for Germany’s capital goods exports.
Strong fiscal measures have reinforced health system capacity while protecting jobs and firms, including through guarantees and equity injections to safeguard liquidity and solvency. The scale of the challenge some firms are facing means that speedy resolution of insolvency will also be important and the high costs of firm failure should be reduced as planned. A short-time work scheme is protecting existing employment relationships for those with jobs. The cost of future lockdowns could be reduced by accelerating the digital transformation by enhancing digital government services and supporting infrastructure deployment, adoption of digital tools by small firms, and skills development.
The health system has proved resilient
Germany has confirmed a large number of COVID-19 cases, principally in the most populous western states. Diagnostic testing capacity was developed and employed quickly. Entering the pandemic, Germany had the highest number of intensive care beds among 22 OECD countries for which recent data are available, with the vast majority of those beds having ventilators. Widespread testing, high health sector capacity and the relatively young average age of those contracting the virus contributed to Germany recording one of the lowest death rates in Europe.
Source: OECD Economic Outlook 107 database; ifo business surveys; Markit.
1. Maastricht definition.
2. Monthly flow of workers mentioned in new notifications. The number does not represent realised workers in short-time work.
Source: OECD Economic Outlook 107 database; Federal Statistical Office; Federal Employment Agency.
A contact ban was imposed between 22 March and 5 June, forbidding public meetings of more than two non-household members, with some easing having started on 6 May. Restaurants and most personal services were required to close, as were non-essential stores, leisure and cultural facilities. Border controls were reintroduced with restrictions on movements of people and quarantine requirements, although special arrangements have been made for commuters and seasonal agricultural workers. A gradual reopening of stores began from 20 April, while state-level decisions have regulated the reopening of restaurants and hotels since mid-May. Schools are opening again gradually after closures since mid-March. Large public gatherings are prohibited until 31 August.
Economic activity has contracted sharply
Indicators of business confidence and activity fell to record lows in April, though the decline in Germany was smaller than in other major European countries. Mobility and construction activity remained higher than in other large European countries. Industrial production in April 2020 was down 25% on the same month a year earlier. Automotive manufacturing has been badly hit, with major car producers shutting operations for six weeks or longer and facing weak and uncertain demand. The overall output loss in early April is estimated at just under 20%, based on industry structure and the stringency of the lockdown. Real-time indicators show economic activity recovering but remaining below normal in May as containment measures were eased. For example, truck mileage was consistent with industrial production running at about 15% below normal in mid-May.
Registered unemployment increased by just over 1% of the labour force between March and May, cushioned by the government-supported short-time work scheme. Since the beginning of March, over 750 000 firms have submitted a notification to potentially use short-time work with the largest increase occurring in April. The cumulative number of workers mentioned in those notifications exceeds 10 million, which is an upper bound for actual take-up. The labour agency estimates that around 6 million workers might have been in short-time work in April, well above its peak of 1.4 million during the financial crisis.
Government support is protecting jobs
The clause for exceptional circumstances in the public debt break was triggered on 25 March to allow debt financing of a supplementary budget of EUR 156 billion (4.5% of GDP) to tackle the health crisis and dampen the initial economic consequences. Early support primarily focused on protective gear and health measures, cash payments to the self-employed and small businesses, expanded social benefits, guarantee provisions, reduced tax revenues and tax deferrals. Further off-balance liquidity support has been provided to firms, such as credit programmes through the national development bank (KfW), credit guarantees and equity injections. An additional package for 2020 and 2021 of EUR 130 billion (3.8% of GDP) announced in early June is aimed at stimulating demand during the recovery. Some measures target consumption, such as a family bonus and the temporary reduction of value added tax rates, while others seek to increase investment in public transport, electric mobility, digital infrastructure, education, and research and development. In addition to spending by the federal government, the labour agency covers spending on short-time work using built-up reserves. The European Central Bank has committed to “do everything necessary within its mandate” to support the euro area economy. Accommodative monetary policy and expanded asset purchases will support aggregate demand, although there is limited room to ease rates from pre-crisis settings.
Discretionary spending of just under 4% of GDP in 2020 under the single-hit scenario will support the economic recovery. This includes all of the spending planned as part of the initial supplementary budget, but not all measures announced in the recovery package, as some require further parliamentary approval and others may take time to be fully implemented. Further fiscal support proportional to the economic impact is incorporated in the double-hit scenario. The number of short-time workers is estimated to peak at around 5 to 6 million in the second quarter of 2020 and decline gradually thereafter, unless there is a significant further outbreak in which case uptake increases again in the fourth quarter. Associated costs for 2020 are over EUR 20 billion in the single-hit scenario and proportionally higher in the double-hit scenario. Extensive use of short-time work will damp the increase in unemployment and facilitate a more rapid resumption of production by maintaining employer-employee relationships.
A second outbreak would slow the recovery substantially
The single-hit scenario is based on 6 weeks of strong containment measures from mid-March to the start of May, with delayed opening of sectors where distancing remains a concern. In the double-hit scenario, containment measures are assumed to restart in the autumn, lasting for two months at half the scale of the first containment, again with delayed reopening of the most affected sectors. Under either scenario, economic output is likely to see its biggest decline of the post-war period in 2020. Private consumption will contract far more than during previous downturns, recovering only gradually as containment measures end. Imports will therefore fall considerably, but net trade still makes a negative contribution to growth due to the larger downturns in other European countries and the effect of weak demand and shutdowns on automotive manufacturing exports. Though strong construction activity has supported business and housing investment in the early stages of the crisis, prolonged weak domestic and external demand will cause business investment to fall rapidly and recover only slowly, particularly under the double-hit scenario. The labour market is unlikely to recover fully by the end of 2021 and spare capacity will help to keep inflation low in the near term.
Financial amplification would see a more protracted recession and is a particular risk given the low profitability and high leverage of the German banking sector, though government intervention could mitigate the economic consequences. Supply chain issues holding up production in automotive manufacturing will become a greater risk if there are further outbreaks that threaten the financial viability of suppliers. Equally, supply chain restructuring to reduce vulnerability could drag on long-term productivity growth, as could a sustained decrease in entrepreneurship if the risks and costs of firm failure are perceived to be too high. A faster rebound is possible as containment measures are withdrawn, particularly if parliamentary approval and resolution of construction capacity constraints allows full disbursement of the government’s recovery package.
Policies can help restart the economy
The government has been transparent in its commitment to spend what is necessary to deal with the crisis while ensuring that temporary schemes such as the expansion of short-time work and liquidity support have clear end dates, which will help the transition to more sustainable budget positions during the recovery. The crisis could potentially trigger substantial shifts in labour demand across sectors and regions, undermining the benefits of keeping employees in their current jobs through short-time work. If disruption persists, more active labour market policy measures are likely to be warranted to support new entry into employment, retraining and reallocation of workers. Preparations should be made to recapitalise banks in a transparent manner, if needed, subject to adequate remuneration for risks taken, clear conditions (for example around dividends) and timelines. The pandemic heightens the importance of good digital infrastructure, skills and government services. Administrative barriers to faster broadband rollout should be reduced, foundational and digital skills prioritised (including ICT training for teachers) and progress towards digital government services accelerated with a priority on high-impact services. The COVID-19 crisis should not be allowed to derail substantial recent progress on climate change policy, such as the introduction of carbon pricing in transport and buildings. Instead, policies to support the recovery should be aligned with Germany’s long-term decarbonisation ambitions. Steps to use previous budget surpluses to fund infrastructure spending are welcome and should be supported by measures to increase financial transfers to municipalities and bolster local planning capacity through intergovernmental co-operation and training.