German Economy: The pandemic recession was not as bad as in 2009

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The country’s federal statistics office predicts a 5% contraction of the economy in 2020 on Thursday compared to the previous year, based on preliminary GDP estimates. In comparison, Europe’s largest economy shrank by 5.7% in 2009 during the recession that followed the financial crisis, a statement said.

Almost all major sectors, with the exception of construction, declined last year.

Household expenditure has fallen and business investment has fallen most sharply since the financial crisis. Imports and exports of goods and services decreased for the first time since 2009, by 9.9% and 8.6% respectively.

But the shallower-than-expected decline in GDP shows the value of Germany’s industrial backbone, making it less dependent on services and consumption than countries like the United States, the United Kingdom, France, Italy and Spain.

“Apparently the strength in the export-oriented manufacturing sector offset the effects of the lockdown,” Commerzbank chief economist Jörg Krämer wrote in a note to customers on Thursday.

The German government has closed restaurants, bars and clubs for the second time starting in early November in an effort to curb a rise in coronavirus cases. Non-essential shops, services and schools closed in mid-December and remain closed.

“Germany’s outperformance reflects the relatively light blockage during the first wave of Covid-19, the low share of tourism and hospitality in the economy, a strong export sector and generous fiscal support,” added Andrew Kenningham, Capital Economics chief economist.

Workers assemble the new ID.4 at a Volkswagen factory in Zwickau, Germany. According to official figures, motor vehicles were Germany's main export product in 2019.
The German government approved a stimulus package worth € 130 billion ($ 158 billion) in June to stabilize the economy and kick-start the recovery. It has also kept unemployment under control thanks to short-time working programs – subsidized by the state – allowing companies to reduce the hours and wages of employees.
The pandemic put an abrupt end to job creation after 14 years of continuous growth, according to the statistics office. Germany cut 477,000 jobs out of 44.8 million in 2020, bringing the unemployment rate to 4%. That’s a long way from the United States, where millions of workers remain unemployed and the unemployment rate was 6.7% in December.

However, the short-term outlook for the German economy is less encouraging.

Lockdown restrictions remain in place, and German Chancellor Angela Merkel warned this week that they may not be relaxed for several weeks.

“While it currently looks like the German economy has avoided a black eye in the last quarter of 2020, it is hard to see how it could perform the same magic again in the first quarter,” said Carsten Brzeski, global chief macro officer economic research at ING, wrote in a note.

“Economic activity is likely to decline again in the first quarter,” added Kenningham. “While manufacturers should continue to benefit from strong external demand, the scope for catch-up growth will diminish as production moves closer to pre-pandemic levels.”

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Still, economists expect GDP to surge once vaccines are more widespread, and warmer weather means people spend more time outdoors, where the virus is less likely to spread.

Lockouts have also boosted domestic savings, which could further boost the economy if households spend some of the extra money, Commerzbank player Krämer said.

That should allow Germany’s GDP to return to pre-pandemic levels by the last quarter of 2021, six to nine months for the wider European economy, Kenningham added.

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