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

© iStock.com/blackred

  • The coronavirus pandemic has led the global economy into recession. Germany, too, will see a decline in its economic output. It is difficult to predict how the situation will develop in the near future. During the second half of the year, however, the economy is expected to start recovering. The measures taken by the Federal Government are helping to minimise the economic impact of the crisis.
  • In the industrial sector, orders, output, and sales had recovered by the beginning of the year. However, the massive drop in supply and demand both within Germany and abroad caused by the coronavirus pandemic reversed the upward trend. Industrial activity is likely to fall sharply in March and in the second quarter of the year.
  • Social lockdown measures have put constraints on a large number of services. Likewise, consumer spending has seen a drastic decline.
  • The coronavirus pandemic is affecting the labour market. There has been a massive increase in notifications of short-time work. Well over a million employees are affected. The rise of employment will not continue, unemployment will rise.

Overall situation: German economy in recession due to coronavirus

Since March, the German economy has been suffering a recession which is likely to last until the middle of the year. In Germany and around the world, the economy is in distress as a result of the pandemic. The collapse in global demand, interruptions in supply chains, changes in consumer behaviour, and a climate of mistrust among investors are having massive repercussions on Germany. The lockdowns imposed in many places around the world to protect public health and save lives are hitting not only industry, but also many services sectors. In Germany, lockdown measures came into effect gradually, starting in mid-March. For this reason alone, even the first quarter is likely to register a marked decline in its economic output average. The trend is expected to continue and gain momentum throughout April. Even if some of the lockdown measures were subsequently eased, the economy would remain subdued and only gradually recover.

At present, the extent of the economic collapse is hard to estimate. According to the Joint Economic Forecast presented by economic research institutes, price-adjusted GDP for the first and second quarters is expected to fall by 1.9% and 9.8% respectively, compared to the preceding quarter. [1] On the assumption that the second half of the year will see a fairly swift economic recovery, the forecast predicts a 4.2% decline in GDP for 2020 as a whole. This assessment is in line with relevant barometers such as trends in stock indexes or the sentiment indicators produced by ifo Institute or IHS Markit. Likewise, a special evaluation of the Truck Toll Mileage Index shows that the last seven days of March, for instance, registered a 10% decline in truck mileage compared to pre-coronavirus levels. By 25 March, over a million notifications of short-time work had been examined, while many more had not been processed yet. The Federal Government has taken a variety of far-reaching measures to curb and manage the economic impact of the pandemic. This explains in part why the Joint Economic Forecast expects a strong recovery by 5.8% for 2021. [2] At present, however, it remains exceptionally difficult to predict the overall course of the economy.

Coronavirus and the world economy: the shape of things to come

The global outbreak of the coronavirus pandemic has sent the world economy into deep recession. As early as January, lower production levels in China led to a 4.3% decrease in global industrial output compared with the same month in the previous year, the sharpest downturn since the financial crisis. In March, the Global Composite Purchasing Managers Index (PMI) published by J.P. Morgan and IHS Markit reached a new record low of 39.4, after it had become clear that the disease was spreading globally. According to the spring report of the Joint Economic Forecast, PPP-adjusted global economic output will shrink by an annual average of 1.8% in 2020 before picking up appreciably again (+5.7%) in 2021.

The global economic crisis is reflected in leading national indicators on foreign trade. For March, ifo export expectations for the manufacturing sector indicate the bleakest mood since the financial crisis. After a first shock during the first quarter of the year that was linked to the lockdown in China, the second quarter is likely to see an even sharper decline in global trade.

Exports in February still stable

Between January and February, exports of goods and services remained fairly constant (+0.0%), after seasonal adjustment and in current prices. The two-month comparison, however, shows a sharp rise of 1.4%. Given the slight increase in export prices, this growth is likely to have been somewhat weaker in real terms.

Imports of goods and services fell markedly by 1.3% from January to February, after seasonal adjustment and in current prices. In the two-month comparison, imports registered a 0.2% increase over the preceding period. If adjusted for price, to take account of considerable decreases in import prices, this increase would be even more pronounced.

Industry slump inevitable

The most recent hard indicators on manufacturing refer to a period of time when the coronavirus pandemic was only starting to make itself felt in Germany. As positive trends in new orders, output, and sales suggested, Germany’s industrial sector was about to turn the corner after a two-year period of weakness. In February, output in the goods-producing industries rose by 0.3% overall. The two-month comparison of January/February versus November/December indicated a clear upward trend in the sector (+1.9%). Construction output even grew by an impressive 4.4%. Although new orders in the manufacturing sector declined in February, they showed a clear rise of 3.3% in the two-month comparison, or 2.4% excluding large orders. Since March, like the rest of the economy, manufacturing has been faced with a very different reality. Due to the coronavirus pandemic, the following months will probably see an unprecedented slump in industrial activity. This is in line with the results of business climate surveys for the manufacturing sector for March: ifo Institute’s Business Climate Index hit a record low when it fell by about 20 points, and IHS Markit PMI dropped sharply to 45.4.

Consumer spending stifled

As a result of social lockdown measures in public spaces imposed for overriding public health concerns, the government has placed tight constraints on economic activities by private households. The measures have particularly impacted retail outlets and services in the leisure, entertainment, cultural, and hospitality sectors, but also in the fields of education and care. Even if retail turnover excluding vehicles, which accounts for roughly a third of consumer spending, rose by 1.2% in February, the following months will most likely see a sharp fall. The GfK Consumer Climate Survey already painted a gloomier picture in March, and a further drastic deterioration is expected for April. The number of new registrations of passenger cars by private owners in March was down by 31.4% compared to the preceding month, and by 34.4% in year-on-year terms. Likewise, ifo’s Business Climate Index for March displayed strong negative values for the retail sector, reflecting the severe downturn in expectations for the coming months. Price trends, in contrast, remained calm. Consumer prices increased by 0.1% in March, with declining energy prices having a dampening effect. The inflation rate dropped to 1.4%, whereas the core inflation rate (excluding energy and food) rose to 1.6%.

A rise in short-time work

The most recent dates for labour market reporting were at times when Germany was still only marginally affected by coronavirus. That is why February showed an increase in employment of 18,000 persons (in seasonally adjusted terms). In January, the number of jobs subject to social insurance contributions rose by 52,000. In the manufacturing sector, however, and especially in the metal and electrical industries as well as the steel industry, it dropped noticeably by around 40,000. Temporary agency employment also displayed a continuous downward trend. On 12 March, unemployment was almost as high as in February. At 2.34 million, the number of persons registered as unemployed in March (unadjusted figure) was 34,000 higher in the year-on-year comparison. Underemployment saw a similar development.

There are signs of a sharp increase, however, in claims for cyclical short-time work allowances. According to an interim analysis by the Federal Employment Agency dated 25 March, notifications of short-time work by 55,000 companies had been processed, affecting over a million employees. By 6 April, the number of businesses notifying short-time work had soared to 650,000. Leading labour market indicators have gone down dramatically, foreshadowing a decline in employment and a rise in unemployment in the wake of the coronavirus crisis.

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[1] The report is based on statistical data that were available as of 14 April 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.
[2] The Federal Government will unveil its spring projection on 29 April 2020.