Eco Perspectives // 4th quarter 2020 (completed on 30 September 2020)
economic-research.bnpparibas.com
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GERMANY
AFTER THE VIRUS, THE THREAT OF ZOMBIES
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.
A REBOUND, BUT NOT IN ALL SECTORS
GROWTH AND INFLATION (%)
The lockdown measures to contain the coronavirus resulted in a
sharp drop in activity in Q2 in Europe. In Germany, GDP contracted by
GDP Growth
Inflation
9
.7%, which compared reasonably well with the rest of the Eurozone
Forecast
Forecast
(
-12.6%). An important reason for this was that the lockdown measures
8
6
were less strict in Germany, as the authorities succeeded in limiting the
spreading of the virus by widespread testing.
4.7
4
Starting at the end of April, lockdown measures have been progressively
lifted resulting in a rebound in activity. After having reached a trough
in April (74.4), the ifo business climate index gradually improved in
the following months and reached 93.4 in September (2015=100).
Nevertheless, activity has remained well below pre-crisis levels. In
July, manufacturing production strengthened by 0.3% on the previous
month, the third consecutive improvement, but was 12% lower from a
year.
1.5
1.9
1.6
1
.4
2
0.6
0.6
0
-2
-4
-
-
6
8
-
5.6
2018
2019
2020
2021
2018
2019
2020
2021
The sector most affected by the pandemic was services, as social
distancing requirements made it difficult to resume activity. Retail
sales rebounded strongly after April. In July, sales were 5.6% higher
than a year ago. By contrast, the hospitality sector continued to suffer.
Despite the strong rebound in turnover in accommodation and food in
July (22% from a month earlier), it was still 27% lower compared to last
year. Overall, the economy is likely to have rebounded strongly in Q3,
by 7.2% (to be announced end October).
CHART 1
SOURCE: BNP PARIBAS GLOBAL MARKETS
IFO CLIMATE INDEX SIGNALS UPTURN
20
Upturn
Sep
Boom
July
0
FURLOUGH MAY DELAY RESTRUCTURING
Jan '19
-
-
-
-
20
40
60
80
Despite the collapse in output in Q2, the labour market held up
reasonably well. The unemployment rate (ILO definition) inched up to
May
March '20
4
.4% in July compared with 3.8% in March. The main reason for this
subdued reaction is the widespread use of furlough (Kurzarbeit). Ifo
estimates that in August, the number of Kurzarbeiter fell by one million
to 4.6 mn, i.e. 14% of socially insured employment. The decline was
mainly due to the trade and the hospitality sectors. Nevertheless, in
the hospitality sector still 34% of the employees are on furlough.
The advantage of Kurzarbeit is that firms would not lose skills during
the crisis. Once demand picks up, staff is available again immediately.
However, this argument sounds less convincing the longer the crisis
lasts. Moreover, Kurzarbeit does not only benefit dynamic sectors
that are only suffering a temporary decline in activity. It also benefits
sectors such as the embattled car and metal industries, and postpones
their necessary restructuring. Furthermore, Kurzarbeit is also widely
used in the hospitality sector. In this case, the scheme is not aimed
at protecting skilled labour and technologically advanced firms but
serves a social objective.
April
Recession
Downturn
-
40
-20
Current business
situations
SOURCE: IFO, BNP PARIBAS
0
20
40
CHART 2
vein, the coalition parties CDU/CSU and SPD have agreed to extend a
freeze on insolvency rules put in place to avoid a wave of corporate
bankruptcies due to the coronavirus crisis. The freeze would have
been ended in September. A new date to end the scheme has not been
set yet. The danger is that the very low interest rate environment in
combination with these policies could create conditions, which are very
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conducive to the creation of zombie companies . Zombies can weigh
Recently, the government decided to keep Kurzarbeit in place at least on the economic performance because they are less productive and
until the end of 2021. The decision was probably politically motivated, their presence lowers investment and employment at more productive
as the general election is to take place in autumn 2021. In the same firms.
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Zombie companies are firms that are unable to cover debt servicing from current profits over an extended period.
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