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

© iStock.com/blackred

  • The coronavirus pandemic has plunged the global economy into recession. Due to the national shutdown, Germany’s economic output declined considerably even in the first quarter. This downward development will initially increase in the second quarter. However, a recovery is already likely to begin within the same period. The measures being taken by the Federal Government are helping this along. Nevertheless, the recovery process will take place over an extended period of time.
  • The wide-scale shutdown is reflected in the number of incoming orders and production in industry, both of which already declined sharply in March and are expected to have fallen even more heavily in April. In addition, the shutdown has also put a ban on many services and has restricted people’s potential to consume.
  • The impact of these developments on the labour market is also being clearly seen in falling employment levels. Notifications of short-time work in March and April are at a very high level. Unemployment has also risen significantly within the space of a month.

General situation: coronavirus pushing German economy into recession

German economic output nosedived in March and April. The economic impact of the coronavirus pandemic has triggered a recession. The slump from mid-March during the wide-scale shutdown was so severe that gross domestic product already fell in the first quarter by an average of 2.2% over the preceding quarter. [1], [2]

The restrictions on social contact, slump in domestic/foreign demand and breaks in supply chains have severely curtailed private consumer spending as well as exports and investment in equipment. Spending increases were made only in investment in construction and public-sector consumption. The recession is likely to have bottomed out in April during the collective halt in production in the automotive industry. Following the cautious start of the easing of the shutdown at the beginning of May, an economic recovery has begun, but will take some time due to the continued prevalence of the coronavirus pandemic. Economic output in Q2 will therefore fall considerably lower than the levels seen in the first quarter. The economic slump is having an enormous impact on employment. The easier access to short-time work created by the pandemic will prevent more extensive job losses, but the number of short-time workers will have risen to an unprecedented level in March and April. It remains unclear as to when and to what extent the economic shutdown will be eased. Uncertainty regarding future developments therefore remains high. The forward-looking indicators of market sentiment are thus not yet sending any signals of hope as of April, although an economic turnaround at the beginning of May seems to be within reach.

World economy facing deepest recession since the financial crisis

The coronavirus pandemic has plunged the global economy into a deeper recession this year than was seen during the financial crisis of 2008/09. Following the significant slowdown in global industrial production in January and February, there are already signs of weaker global value creation in the first quarter. This is primarily due to production stoppages in China from the beginning of 2020. The global spread of the pandemic is not yet reflected in these data. This is one of the reasons why the decline in global trade at the beginning of the year is still moderate compared to the previous month, at -1.4% in January and -1.5% in February. The Global Composite Purchasing Managers Index (PMI) published by J. P. Morgan and IHS Markit puts out a new historic low of 26.5 points in April, well below the growth threshold of 50 points, indicating a more severe slump in the global economy in the coming months. The first major economies are reporting significant declines in GDP for the first quarter, e.g. China -9.8%, the eurozone -3.8%, the USA -1.5%, each adjusted for price and seasonal variations and compared to the previous quarter. In its April projection, the IMF forecasts that global economic output will shrink by 3.0% in 2020, adjusted for price and purchasing power. At the time of the global financial crisis, the decline amounted to only 0.1%. A significant recovery is expected in 2021 with a plus of 5.8%. Nevertheless, this scenario assumes that the economic output of the developed economies will still not have returned to its pre-crisis level at the end of 2021.

National indicators of foreign trade are also hit by the shock caused by the coronavirus pandemic. Incoming orders from abroad slumped by 16.1% in March in real and seasonally adjusted terms. The ifo export expectations for the manufacturing sector in April have fallen to a record low. In view of the continued global spread of the pandemic, a further decline in exports is expected for the second quarter. A gradual recovery of the global economy is not expected until the second half of 2020. However, German foreign trade is likely to pick up again somewhat from May onwards. Even in this case, however, German exports and imports are expected to decline significantly on average in 2020.

Exports and imports experiencing a sharp slump

As a result of the coronavirus pandemic and the measures taken to contain it, exports of goods and services fell sharply in March, dropping by 11.5% month-on-month in seasonally adjusted terms and current prices. In the first quarter, exports fell by 2.9%.

Imports of goods and services also nosedived in March, falling by -6.6% in seasonally adjusted and nominal terms compared to the previous month. Imports fell by 2.4% compared to the previous quarter. The significant drop in import prices is likely to somewhat mitigate the price-adjusted decline.

Economic slump in industry

The global economic shocks caused by the coronavirus pandemic are hitting German industry hard. In March, industrial production fell by 11.6%, while the construction industry was still able to record an increase of 1.8%. Thanks to the good start to 2020, the figures for quarter-on-quarter comparison are still moderate. Production in the manufacturing sector as a whole fell by only 1.2% in the first quarter. Industrial output was reduced by 2.4%, but was bolstered by construction output, which grew by 5.5%. Within the industrial sector, mechanical engineering and the motor-vehicle sectors cut back production particularly sharply (-3.9% and -9.6% respectively). However, manufacturers of chemical and pharmaceutical products recorded a significant increase in the first quarter (+3.6% and +2.2% respectively). New orders in the manufacturing sector slumped by 15.6% in March in the wake of the coronavirus pandemic due to declines in both domestic and foreign demand. In the first quarter as a whole, there was a decline of only 2.7% due to the good start to 2020. In view of the shutdown from the second half of March onwards, a much sharper drop in production can be expected in April. This is also in line with the results of business climate surveys for the manufacturing sector in April. The ifo Institute’s Business Climate Index plunged to a record low of -44.4 points, and IHS Markit PMI dropped sharply for the second time in a row, settling at 34.5.

Consumption slows down sharply

Measures to control the spread of the infection led to a keen reduction in social consumption 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. Although retail sales excluding vehicles got off to a good start to the year, they slumped by 4.0% in March in the wake of the shutdown. Having already fallen considerably in March and April, the GfK Consumer Climate Survey reached a historic low in May. New car registrations by private owners fell drastically in March and April compared with the previous month as a result of showroom closures in March and April. As of April, they are almost 60% below the previous year's level. The ifo Business Climate Index in the retail sector fell deep into negative territory in March and April and also presents a drastic deterioration in expectations for the coming months. Price trends remained extremely calm. Although consumer prices rose by 0.4% at Eastertime in April for seasonal reasons, declining energy prices continued to have a dampening effect. The rate of inflation fell to 0.9%. The core inflation rate (excluding energy and food) dropped somewhat less steeply, falling to 1.2%.

Labour market: huge amount of short-time work minimises unemployment

In the current reporting month of April, the effects of the coronavirus pandemic are clearly visible. Seasonally adjusted unemployment rose by 373,000 persons. However, about one third of this increase is due to the difficulties faced in gaining access to labour-market schemes. According to the original figures (2.64 million persons), unemployment rose by 415,000 compared with the preceding year. Notifications of cyclical short-time work continued to skyrocket, rising from 2.6 million in March to 7.5 million between 1 and 26 April. In total, 10.1 million people were registered for short-time work in just under two months. The hospitality industry, the metal and electrical industries and other services are the main areas in which these jobs were offered. However, it should be borne in mind that not all of the short-time work notified will actually take place, as the past has shown. Seasonally adjusted employment fell by 41,000 persons in March. Employment subject to social security contributions rose by only 11,000 persons in February. Leading indicators suggest a continued slump in employment in industry, trade and other service sectors, as well as a further rise in unemployment.

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[1] The report is based on statistical data that were available as of 15 May 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] Preliminary data on GDP development in the first quarter of 2020 issued by the Federal Statistical Office on 15 May 2020.