Growth curve with pen symbolizes the economic situation; source: iStock.com/blackred

© iStock.com/blackred

  • At the start of the new year, there were initially signs of the economy picking up. In view of the spread of the coronavirus, the economy is expected to develop much more moderately, from March at the latest.
  • Industrial orders, sales and output increased significantly at the beginning of the year, also due to special effects. Business expectations in the manufacturing sector brightened again somewhat in February. However, the effects of COVID-19 on the economy had not yet been taken into account at this stage.
  • The indicators for private consumer spending provide a mixed picture.
  • Employment is continuing to experience positive, albeit moderate development. Unemployment figures remained flat.

GENERAL SITUATION: SLIGHT UPWARD TREND STOPPED BY CORONAVIRUS
The coronavirus is affecting the German economy. It is currently impossible to estimate how long and to what extent the coronavirus will affect the German economy, as no reliable economic data is available yet. It is also still unclear how quickly the coronavirus will spread and how strongly it will affect the health of the population. However, due to the very dynamic development of the situation, it is to be expected that there will be significant effects on economic activity. This comes against the background of the German economy having just been in the process of overcoming its long period of economic weakness, which, in part, resulted from the global industrial recession and trade conflicts and has been ongoing since the beginning of 2018. After gross domestic product stagnated in the final quarter of 2019, industrial orders, sales and output rose sharply in January.[1] This development is indicative of a appreciable economic recovery in the first quarter of 2020. However, a further economic upturn is now no longer expected, as the German economy in February and March is likely to see a drop in foreign trade with some countries that are already more severely affected by the virus. The service sector will also see a decline resulting from changes in consumers’ spending habits. The future economic development will be determined by the further spread of the coronavirus at national and global level. On the supply side, the German economy is likely to be affected by potential disruptions to supply chains and output shortfalls due to workers’ incapacity to work. On the demand side, it is expected that demand for exports will decrease and that domestic demand will fall significantly due to consumers’ hesitance to purchase. Pandemics can spread in waves around the world, but experience accumulated so far has shown that they tend to be short and severe in the individual regions affected. Based on this knowledge, a noticeable downturn of the economy can be expected in the second quarter of this year, but economic activity may stabilise again in the third quarter, provided that supply chains become intact again quickly.

The current high level of uncertainty about the future economic development is also reflected in sharp fluctuations on the financial markets. Since the beginning of the last week of February, the financial markets have been waiting for a reassessment of the situation. On 6, 9 and 12 March, in particular, financial markets saw major price losses. The DAX, Germany’s leading index, for example, has now lost around 30% compared with its level on 21 February, as has the DOW JONES, the leading index in the U.S., which lost around 27% in the same period.

GLOBAL ECONOMIC SITUATION: ECONOMY SLUGGISH EVEN BEFORE CORONA CRISIS HIT
The global economy is still sluggish – although the indicators currently available do not yet for the most part reflect the effects of the spread of the coronavirus on the economy. In December, global trade in goods, which has recently been slowed down primarily by protectionist tendencies, saw only modest growth compared with the previous month. For the first time since the financial crisis, the global trade volume in 2019 was lower than in the previous year. However, global industrial output in December was again slightly higher than in the previous year. This notwithstanding, global industrial output in 2019 as a whole experienced the lowest growth in ten years.

By contrast, the coronavirus is starting to be reflected in leading indicators: Following the disruptions in production in China, the J. P. Morgan / IHS Markit purchasing managers’ index for the global economy in February plunged to a historic low, dipping below the growth threshold of 50 points. International organisations’ first reaction to the development in China has been to revise their forecast for the global economy downwards, in some cases even considerably. However, the consequences of a greater spread of the virus and its impact on global demand and international value chains are difficult to assess at the present time. In any case, a further spread of the virus and the associated imponderables are likely to further slow the overall weak development of the global economy.

GERMANY’S FOREIGN TRADE STILL WEAK
The weak global economic activity is reflected in the figures for German foreign trade. Exports of goods and services rose by 0.2% from December to January, after seasonal adjustment and in current prices. The two-month comparison shows a slight minus of 0.3%, which is likely to be somewhat higher in real terms due to slightly higher export prices. Current indicators do not point to a significant recovery, although most of the data were collected before the spread of the coronavirus. For example, the ifo export expectations of the manufacturing industry have not brightened significantly in recent months. New orders from abroad rose strongly in January, but this was mainly due to some particularly large orders and pent-up demand resulting from the holidays.

Imports of goods and services fell by -0.3% from December to January, after seasonal adjustment and in current prices. In the two-month comparison, imports stagnated in nominal terms (+0.0%). However, against the background of slightly higher import prices, there is likely to be a slight decrease in price-adjusted terms.

OUTLOOK FOR GERMANY: SLIGHT RECOVERY WILL NOT PREVAIL
The indicators most recently available for the manufacturing industry cannot yet have been influenced by the corona crisis. Both new orders and output experienced significant growth in the reporting month of January. This is, however, to some degree attributable to pent-up demand resulting from an above-average number of days taken off in December to bridge the gap between the national holidays and the weekend. In addition, the high overall volume of new orders is likely to be due to large orders. Overall, the outlook for industry had thus just brightened somewhat before COVID-19. The global spread of the coronavirus, however, may create a new, most severe shock for industry, with its negative effects on the economy still being difficult to assess. In January, output in the goods-producing industries rose by 3.0% overall. The industrial sector and the construction industry grew by 2.9% and 4.7% respectively. In the two-month comparison of December/January against October/November, overall output in the goods-producing sector and industry remained virtually unchanged (-0.1% respectively). By contrast, construction output expanded by 0.7%. New orders in the manufacturing sector rose slightly, climbing by 0.2% in the two-month comparison, and were even up 0.5% after adjustment for large orders. The business climate in the manufacturing sector improved in February for the third month in a row. As a result, the outlook for the next six months has brightened somewhat. However, it seems that the consequences of the coronavirus have not yet been taken into account here.

CONSUMER SPENDING PROVIDES LESS IMPETUS
Private consumer spending stagnated in the final quarter of 2019; it had, however, seen a significant rise in in the third quarter. Before the uncertainty around the coronavirus and its effects spread, it was expected that the domestic economy would continue to be robust, given the expected positive development in disposable income and a further increase in employment. However, due to the virus, it can be expected that there will be changes in consumers’ spending patterns and a noticeable decline in private consumer demand, at least temporarily. At the beginning of the year, i.e. before the coronavirus struck, the indicators showed a mixed picture. Retail turnover excluding vehicles, which accounts for roughly a third of consumer spending, rose in January by 0.9%. After rising by 0.8% in the fourth quarter, the number of new registrations of passenger cars was much lower in January and February than at the end of the year. The business climate in the retail sector cooled somewhat in February, but on balance remained positive and was clearly above its long-term average. Price trends remained calm. Consumer prices expanded by 0.4% in February, with declining energy prices having a dampening effect in this context. Both the inflation rate and core inflation (excluding energy and food) remained unchanged, standing at 1.7% and 1.5% respectively.

LABOUR MARKET REMAINS ROBUST IN THE REPORTING MONTH
In spite of the sluggish economic growth, the labour market remained largely robust. The growth in employment (+18,000 persons) in January was roughly as high as the average for the last twelve months, adjusted for seasonal factors. In December, employment subject to social security contributions even grew as strongly as it last did at the beginning of 2019, and was up by +59,000. However, the development in the temporary employment sector (-10,000 persons) shows that the economic slowdown is having a major effect. Unemployment has remained flat since the summer, declining in February for the second month in a row (-10,000 persons). At 2.4 million, the number of persons registered as unemployed (unadjusted figure) was again slightly higher (up 23,000) in the year-on-year comparison. Underemployment developed in a similar way. There are signs of a faster increase in the claims of cyclical short-time work allowances, even though the latest data on short-time work do not reflect this yet: In December, short-time work allowances were claimed by 90,000 persons, which was less than in November, and the preceding notifications of cyclical short-time work also declined slightly, by 42,000, in January before the spread of the coronavirus. The leading indicators continue to point to a slight increase in employment and little change in the area of unemployment. At this stage, however, it remains unclear to what extent the spread of the coronavirus will affect the labour market.

Note:
Further information on the current economic situation will be published in the April edition of the monthly report, Schlaglichter der Wirtschaftspolitik (“Economic policy highlights”, in German only). This report is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy at the end of the 13th week of 2020.

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[1] The report is based on statistical data that were available as of 13 March 2020. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.