The second lockdown interrupted an already stalling recovery. However, the business climate is likely to improve soon on the expectation that several vaccines might soon be available. Inflation is currently in negative territory because of the VAT cut, but will soon turn positive again once the measure expires on 1 January 2021. Because of the second lockdown, the 2021 budget will show a larger deficit than assumed in September, EUR180 bn or 5.2% of GDP. In Q2, the household savings rate rose to 20.1%, a new historical high. Once the pandemic is over, the savings rate could drop considerably if consumers catch up on postponed purchases.
The Pulse for Germany offers an interesting picture this week. In general, the economic situation has clearly improved in the period September-November compared to the preceding three-month period. This is most obvious in the manufacturing and construction sectors...
According to the Pulse, activity in Germany recovered strongly in the past three months. The blue area of the chart spread out further compared to three months ago (demarcated by the dotted line). Activity in the manufacturing sector strengthened, on the back of well-filled order books. Nevertheless, in August (last observation), activity remained around 10% from levels seen a year ago. In particular, production of investment goods remained weak as low utilisation ratios and high uncertainty weighed on capital expenditure. In the car industry, production was even almost 30% lower from last year...
Even 30 years after reunification, income differences persist due to a productivity gap in the new Länder. Productivity is about 20% lower than in the rest of the country. The largest income differences are in the manufacturing sector, as headquarters and research centres remain concentrated in the West. Many young people have moved from East to West attracted by higher wages and better living standards. Between 1991 and 2016, the new Länder lost about one quarter of their working-age population. East and West have become closer demographically. Net migration is actually around zero, as income prospects in the East have improved. In addition, some regions in the West are now also experiencing a rapid ageing of their population, as has been the case in the East.
A strong rebound is expected in Q3 (7.2%) following the progressive lifting of restrictions. Nevertheless, the recovery is likely to remain slow and bumpy at times, at least until there is a Covid-19 vaccine or a better treatment. Thanks to the widespread use of furlough, the labour market has held up reasonably well. However, the scheme may also have been delaying a necessary restructuring, which could weigh on the long-term performance of the economy. The huge increase in public spending to ease the economic consequences of the virus have forced the authorities to activate the debt brake exemption clause. The excess debt will be repaid over 20 years starting in 2023.
The Covid-19 pandemic has led to the most severe recession in Germany’s post-war history. The sudden drop in revenues in combination with only partly adjustable costs has led to a fast depletion of firms’ cash buffers. Business felt compelled to reduce inventories, cancel orders and defer investment projects. This had the effect of deepening the recession. It might be tempting to think that investment could quickly regain traction again, as it did following the Great Recession in 2008-09. This sounds too optimistic. European Investment Bank (EIB) researchers estimate that the European corporate sector could have lost revenue between 13% and 24% of GDP because of the Covid-19 pandemic[1]
Compared with three months earlier, the blue area of the chart – representing data for the last three months – is spreading out like an oil stain. Nevertheless, most indicators remain well below their long-term average, i.e. the inner grey circle in the chart. In particular, indicators for households and services improved substantially, due to the lifting of the lockdown restrictions. Retail sales boomed in the period May-July following the reopening of shops and the temporary reduction of the VAT rate in July [...]
In Germany, business conditions during the past three months were in general worse than in the preceding three-month period (area within the dashed line). That is most obvious in the production-related hard data, which cover the lockdown period March-May...
With the gradual easing of the lockdown restrictions, economic activity has shown signs of rebounding. The government stimulus plan might give further impetus to growth and also contribute to lower carbon emissions. The prospect of an EU stimulus is good news for Germany’s export-oriented manufacturing sector. However, in the absence of a Covid vaccine or better treatments the recovery is likely to be bumpy. GDP is unlikely to return to its pre-Covid level before 2022
In the past decades, German enterprises have been offshoring activities, in particular to Central and Eastern Europe and China. Despite the slowing of the globalisation pace in recent years, German industry is still losing ground in textiles, chemical and pharmaceuticals, and computers, electronic and electrical equipment. Despite China’s dominance in global manufacturing production, Germany has remained an important global and regional player. Supply chains disruptions related to Covid-19 have increased calls for a reassessment. However, it is unlikely to lead to radical changes in global supply chains. Only in case of market failures, as seen in the field of pharmaceuticals, policies should be developed to correct them.
The significant shrinking of the blue area in today’s Pulse indicates that the economic climate has substantially deteriorated during the past three months because of the lockdown measures in order to stop the Covid-19 pandemic. However, there were some remarkable differences [...]
The Federal Republic of Germany is a parliamentary republic headed by a chancellor and a president. It comprises sixteen states (Bundesländer). Each state has its own state constitution, and is largely autonomous concerning its internal organisation. The most prosperous states are Bayern and Baden Württemberg in the southern part of the country. GDP per capita in these states are about 15% higher than the German average. The dynamism of the area is largely due to its sector specialisation. Manufacturing production makes up around 30% of production, and is concentrated in hi-tech industries.
With 83 million inhabitants the Federal Republic of Germany is the leading economy in the Eurozone both in population terms and its share of Eurozone GDP (more than one third). GDP per head is 20% above the Eurozone average, making it one of the most prosperous Eurozone countries. Germany is the world’s fourth largest economic power after the US, Japan and China, and the third largest exporter after China and the US.
The manufacturing sector plays a vital role in the economy. It accounts for almost 20% of employment and contributes almost a quarter of total value added. However, industry’s central role makes Germany’s economy more cyclical than some of its neighbours
