Perspectives

Strong recovery from mid-2021

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Eco Perspectives // 2 Quarter 2021  
economic-research.bnpparibas.com  
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GERMANY  
STRONG RECOVERY FROM MID-2021  
After a difficult start of the year, business cycle indicators improved markedly in March on the hope that the worst  
of the Covid-19 crisis is behind us. GDP is projected to reach the pre-Covid-19 level by the end of 2022. Many of the  
government support measures will remain in place this year. Fiscal policy for 2022 will depend on the outcome of  
the general election in September. After a significant weakening of the Christian-Democrats in the polls, a coalition  
between Greens, social-democrats, and liberals cannot be excluded. The business sector has been severely weakened  
during the crisis, but this is unlikely to have long-term consequences.  
THE FIRST GREEN SHOOTS IN MARCH  
GROWTH AND INFLATION (%)  
The increase in corona cases in Q4 2020 forced the authorities to  
impose a second lockdown from the beginning of November. In  
GDP Growth  
Inflation  
particular, services that involved intensive social contacts, such as bars,  
restaurants and theatres were closed. By mid-December, non-essential  
shops had also to lower their shutters. As a result, GDP grew by only  
Forecast  
Forecast  
4.8  
5
3
1
1
3.0  
0
.3% compared with 8.5% in Q3. This was the result of two opposing  
2.1  
forces. On the one hand, activity in manufacturing and construction  
increased by more than 5%, while activity in market services (trade,  
communication and hospitality) contracted by around 4.4%.  
1.4  
1.5  
0.6  
0.4  
-
This dichotomy between manufacturing and services was also observed  
in early 2021. Activity in the manufacturing sector continued to expand,  
despite the disruption in the car industry caused by shortages of  
semiconductors. By contrast, construction activity was severely affected  
by adverse weather conditions in January and February, while services  
remained subjected to lockdown restrictions. In March, the economic  
climate improved considerably. The IFO climate indicator rose to 92.7,  
a highest since September 2020. In particular, business optimism about  
the coming months rose sharply on the back of expectations of the  
easing of lockdown restrictions as infections were set to decline due to  
the ongoing vaccination campaign.  
Despite the sharp fall in activity in 2020 (-4.9% and -5.3% adjusted for  
calendar effects), the unemployment rate rose only to 4.6% compared  
with 3.4% in early 2020. This is largely due to government measures  
to ease the impact of the crisis, and, in particular, the furlough  
scheme (Kurzarbeit). The Ifo Institute estimates that 2.8 million or  
-3  
-5  
-
5.3  
-7  
2019  
2020  
2021  
2022  
2019  
2020  
2021  
2022  
CHART 1  
SOURCE: BNP PARIBAS GLOBAL MARKETS  
MANY EMPLOYEES STILL ON FURLOUGH  
7 million  
Manufacturing & Construction  
Accomodation & Food services  
Other  
Trade & Communication  
Other market services  
6
5
4
3
2
1
0
8
.5% of employees made use of this scheme in February (chart 2). In  
accommodation and food services, more than 50% of employees were  
on furlough.  
FISCAL POLICY REMAINS ACCOMMODATIVE  
The Federal government was quick to respond to the corona crisis and  
ease its impact on activity. In March, a comprehensive support package  
for employees and enterprises worth EUR 750 bn (22% of GDP of 2019)  
was deployed. As a large part of the package consisted of guarantees,  
loans and tax deferrals, public spending rose by EUR 127 billion, of  
which €50bn was made available to support small businesses and  
self-employed persons. In June, the government presented a second  
support package worth EUR 130 bn. The measures focused on boos-  
Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21  
CHART 2  
SOURCE: IFO, BNP PARIBAS  
ting demand through a temporary cut in the VAT - from 19% to 16% and the disappointing tax receipts, the financial deficit of the gene-  
between July and December 2020, providing families with an additional ral government increased to 4.2% of GDP, a highest since 2009. Public  
EUR 300 per child and doubling a government-supported rebate on sector debt amounted to 70% of GDP by the end of the year. For 2021,  
electric car. It also contained a €50 billion fund for addressing climate the deficit is likely to move sideways and the debt ratio could further  
change, innovation and digitalisation. In November and December, increase to 75%. However, this is substantially lower than during the  
further measures were introduced to support the most affected bu- financial crisis, when the debt ratio reached 82.4% in 2010. In 2022,  
sinesses during the renewed lockdown. As a result of these packages the government budget is expected to improve sensibly as stimulus  
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Eco Perspectives // 2 Quarter 2021  
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measures expire and tax receipts will rise because of the economic  
upswing. The deficit could fall below 2% of GDP.  
STEEP INCREASE IN BUSINESS INDEBTEDNESS  
The 2022 budget will depend on the next government. The current  
coalition between the Christian-Democratic parties (CDU/CSU) and the  
Social Democratic Party (SDP) is unlikely to be continued after the next  
general election, to be held on 26 September. The CDU/CSU, recently  
weakened by scandals, is likely to remain the largest block in the  
Bundestag. It might seek to form a coalition with the liberals (FDP) and  
the Greens, the so-called Jamaica coalition. On paper, it could reckon on  
a large majority in parliament. However, the programmatic differences  
might be hard to bridge. Since the weakening of CDU/CSU in the polls,  
a coalition of Greens, SDP and FDP, the so-called traffic light coalition,  
could become possible. At the moment, the combination stands to gain  
close to 50% of the seats. It might be very attractive for the Greens,  
as the leader of the party would become Chancellor for the first time.  
66 % of GDP  
64  
62  
60  
58  
56  
54  
52  
5
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
CHART 3  
SOURCE: DEUTSCHE BUNDESBANK, BNP PARIBAS  
HIGH ENTERPRISE DEBT, BUT NO LONG-TERM ECONOMIC  
DAMAGE  
The outlook for 2021 depends largely on the course of the pandemic  
and the progress in the vaccination process. In our scenario, we If the going concern value drops below the market value, liquidation  
assume that the decline in infection rates will allow a gradual easing of the firm will ensue, the excess debt will be erased and the assets  
of the lockdown measures eased from mid-April onwards. In that freed up for other productive ends. The smoothness of the liquidation  
case, services could join manufacturing as a driving force behind the depends on the efficiency of the insolvency process. In that respect,  
recovery. GDP is projected to grow by 3% in 2021 and 4.8% in 2022. By Germany is well placed. It has one of the most efficient insolvency  
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end 2022, GDP would have reached pre-Covid-19 level.  
regimes in the world . On average, the length of the procedure is just  
over a year, with a recovery rate of almost 80% and the costs amount  
to only 8% of the estate.  
A major question is what will happen to enterprises if the government  
support measures are gradually withdrawn. In the past year, these  
measures have been very effective in keeping unemployment down  
and avoid bankruptcies. Despite economic activity contracting by  
around 5% in 2020, the number of bankruptcies actually declined by  
Completed on 1 April 2021  
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5.5% compared to 2019. This is not only due to the suspension of the  
obligation for insolvent firms to file for bankruptcy, but also because  
of loans and grants that companies have received. Many fear that the  
state’s generosity could increase the number of zombie firms, thus  
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weakening the structure of the economy . In a recent survey of the  
Ifo Institute and Frankfurter Allgemeine Zeitung among a panel of  
economists, 86% of them believed that the number of zombie firms  
had “increased” or “strongly increased” in Germany since March 2020.  
It is likely that the lifting of the support measures will lead to an  
increase in bankruptcies. Even though for most firms, it will be  
business-as-usual, many of them may face high debts and some firms  
with a viable business model might even need to be restructured.  
Indebtedness of the non-financial sector has reached a record level,  
which could weigh down on investment and productivity (Chart 2).  
The reassuring news is that research by a group of German and US  
economists shows that a boom in business loans is not likely to damage  
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the economy in the long-term . A possible explanation is that firms  
may switch to other internal sources of financing, i.e. equity instead  
of debt. Moreover, firm liabilities are ultimately limited by firm assets.  
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Baudchon, H., Boisset, L., Derrien, G., Van der Putten, R. (2021). European Union: Europe: the shock of Covid-19 and the fear of accelerated zombification, BNP Paribas Conjoncture, January.  
Jordà, Ò., Kornejew, M., Schularick, M., & Taylor, A. M. (2020). Zombies at large? Corporate debt overhang and the macroeconomy (No. w28197). National Bureau of Economic Research.  
The World Bank Group, Doing Business 2020  
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