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

© iStock.com/blackred

  • The impact of the coronavirus pandemic has led the German economy into a deep recession. As the country went into lockdown in March and April, economic output suffered a drastic reduction. Following the relaxation of contact restrictions, economic activity has been picking up again since May. The recovery of the economy will take time, however, because epidemiological risks continue to exist and influence the behaviour of citizens and businesses. The measures taken by the Federal Government, which do not pale in scope when compared to other countries, are helping the economy to get back on track.
  • The full impact of the lockdown now manifests itself in April figures for new orders and output in industry. After declining sharply in March, industrial activity suffered an even more dramatic slump in April. Consumer spending also fell in April, but leading indicators suggest it picked up again in May.
  • The slump in economic activity and the restrictions that were imposed to contain the pandemic are having a severe impact on the labour market. Gainful activity is declining sharply. Unemployment rose significantly for the second month in a row, even if the increase was not as marked as the month before. The widespread use of short-time work is helping to prevent lay-offs.

Overall situation: gradual recovery after trough in April

The German economy is currently in a deep recession which reached its trough in April as a result of tough lockdown measures. May marks the beginning of economic recovery as coronavirus restrictions are gradually lifted. Given the steep slump and partial halt in industrial production witnessed in April, Germany looks set to register a fairly marked initial recovery in May and June. Nevertheless, overall economic output as averaged for the second quarter will show a far more pronounced slump than the -2.2% decrease of the first quarter.[1] During the second half of the year and beyond, the economy will recover more slowly. External economic stimuli will remain weak for a long time to come, and given the risk of a resurgence of the pandemic, the changes in the behaviour of citizens and businesses are likely to persist. Even though meaningful official cyclical indicators are as yet only available for April, conventional and less conventional leading indicators and the fact that the lockdown has been lifted suggest that the recession has bottomed out. For example, the ifo Business Climate Index and the IHS Markit Purchasing Managers Index recovered somewhat in May. Also, high-frequency data such as movement data by Google and the Truck Toll Mileage Index indicate a significant rise in economic activity.

World economy: global GDP slumps in first quarter

Data for the first quarter of 2020 are gradually revealing the extent of the global recession that was caused by the coronavirus pandemic. Global economic output fell by 2.9% against the preceding quarter, after price adjustment and in US dollars. At the peak of the financial crisis in early 2009, global GDP had contracted by only 1.9%. The slump during the first quarter of 2020 is primarily due to production stoppages in China from the beginning of the year. These data do not yet reflect the global spread of the pandemic and the lockdown measures imposed across large parts of the world. After falling by 2.5% in the first quarter compared to the previous one, global trade in goods is expected to show another more severe downturn in the second quarter. Leading indicators of sentiment, however, give grounds for cautious optimism as lockdown measures start to be relaxed across the world. In May, the Global Composite Purchasing Managers Index (PMI) published by J.P. Morgan and IHS Markit reached 36.3 after April’s record low of 26.2. However, it was still well below both the growth threshold of 50 points and pre-crisis levels.

In the baseline scenario underlying its June projection, the OECD expects global economic output to shrink by 6.0% in 2020, adjusted for price and purchasing power. At the time of the global financial crisis, the decline amounted to only 0.1%. The OECD displays far greater pessimism than the IMF, which forecast in its April projection that the world economy would contract by 3.0%. The variation is mainly due to differing assumptions regarding the further development in newly industrialised countries. For 2021, both institutions expect global economic output to pick up markedly again (OECD: +5.2%; IMF: +5.8%). According to the OECD’s baseline scenario, it is only by the end of 2021 that the world economy will finally reach pre-crisis levels.

Indicators on German foreign trade present a mixed picture. In April, incoming orders from abroad dropped by an unprecedented 28.1% (in seasonally adjusted terms), compared to the previous month. On the other hand, ifo export expectations for the manufacturing sector were less pessimistic in May than in April. In fact, nearly 14% of companies currently expect the situation to improve within the next three months. Given April’s historic slump, German foreign trade is likely to have been on the road to recovery since May. Nonetheless, German exports and imports are expected to decline significantly on average in 2020.

Exports and imports witness historic decline

Between March and April, exports of goods and services dropped by 23.6% in seasonally adjusted terms and in current prices, overshadowing the downturn of -10.9% registered the month before. The two-month comparison for March/April reveals a historic decline of 21.2%. Exports to the eurozone and the rest of the EU were hit harder than those to non-EU countries. The decline in exports affected goods such as motor vehicles, other vehicles, machines and electronic equipment.

Similarly, imports of goods and services declined more sharply in April than in March (-6.6%), falling by -17.7% in seasonally adjusted and nominal terms compared to the previous month. In the two-month comparison, imports fell by an exceptional 15.3%, a development that also reflected declining import prices.

Industrial output hits a 23-year low in April

April figures for industrial production in Germany reflect the economic impact of the lockdown. Compared to March, output fell by a historic 22.1% in seasonally adjusted terms. The index value of 70.0 points (2015=100) marks the lowest level since January 1997. At 15.1 points, car production virtually came to a halt. Meanwhile, construction output shrank by 4.1% in April. In the two-month comparison for March/April, which covers the entire period of the tough lockdown, industrial output dropped by 20.6%. Output declines were particularly severe in the automotive and mechanical engineering sectors, amounting to -57.5% and -18.8% respectively. The slump in these two sectors accounts for about two thirds of the decline in industrial production registered in March/April. The construction sector, by contrast, suffered only a slight fall in output, registering a figure of -1.2% in the two-month comparison.

New orders in the manufacturing sector slumped by 25.8% in April due to declines in both domestic and foreign demand. In the two-month comparison, they dropped by 26.3%. In view of these historic lows, the progressive relaxation of lockdown measures and the cautious restart of car production, industrial output is expected to pick up markedly in May. This is also suggested by the available leading indicators. The ifo Business Climate Index for the manufacturing sector recovered from its record low of -44.5 to reach -36.4 points, but remains negative. The industry sub-index of the IHS Markit/BME Purchasing Managers Index also improved, albeit less markedly. Also, the Truck Toll Mileage Index has been trending upwards since mid-April, with its seven-day-average at the end of May falling short by just 5% of its pre-year level.

Consumer spending picks up again after suffering severe slump

April, which was affected throughout by coronavirus containment measures, also saw consumer spending in social settings decline noticeably. The lockdown was felt particularly keenly by retail outlets and services in the leisure, entertainment, cultural and hospitality sectors, but also in the fields of education and care. After declining by 4.0% in March, retail sales (excluding vehicles) fell by a further 5.3% in April. Judging by the available data for subsequent months, however, there are grounds for optimism: the GfK Consumer Climate Survey for June is already on the road to recovery after reaching a record low in May. As a result of showroom closures, new car registrations by private owners had fallen drastically in March (-31.5%) and April (-31.0%) month on month. In May, however, they already rebounded noticeably (+29.7%). Similarly, the ifo Business Climate Index in the retail sector had fallen deep into negative territory in March and April, but recovered in May so that it almost reached March levels again. Price trends remained calm. Consumer prices fell by 0.1% in May. Adjusted for declining energy prices, however, they registered a slight increase of 0.1%. The rate of inflation fell to 0.6%. However, the core inflation rate (excluding energy and food) rose marginally to 1.3%. The discrepancy this reveals when compared to the consumer price index illustrates the strong downward pressure of the energy prices.

Labour market: rising unemployment despite massive use of short-time work

In May, the situation on the labour market deteriorated. Seasonally adjusted unemployment rose steeply by 238,000 persons, and by 600,000 within two months. At 2.81 million, the number of persons registered as unemployed (unadjusted figure) was 577,000 higher in the year-on-year comparison. Short-time work is helping to prevent a further rise in unemployment. The number of notifications of cyclical short-time work remained high in May (1.1 million people), but had gone down from previous levels. The areas that are particularly affected include the hospitality industry, the metal and electrical industry and other services. According to provisional data, in March, when the lockdown began, 2.02 million people were already receiving cyclical short-time work allowances. That number was considerably higher than the record high that had been registered during the economic and financial crisis in 2008/2009. Preliminary estimates by the Federal Employment Agency suggest that April will see an increase to roughly 6 million people. April also registered a month-on-month decline of 275,000 persons in seasonally adjusted employment figures for Germany, the greatest decrease since German reunification. Also, according to figures for March, employment subject to social security contributions fell by 21,000 persons, particularly in the hospitality sector, the manufacturing industry and in temporary employment. Judging by leading indicators, there are no grounds to expect a sustained recovery within the following months.

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[1] The report is based on data that were available as of 15 June 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.