Despite the contraction for the second quarter being worse than expected, employment remains stable and a third-quarter rebound is expected
The German economy shrank by a record 10.1% in the second quarter as coronavirus lockdowns took their toll, official data showed on Thursday, but experts say a recovery is already underway.
Federal statistics agency Destatis called the quarter-on-quarter decline in GDP “historic” and far bigger than any slump seen during the 2008/2009 financial crisis.
Economy minister Peter Altmaier had warned earlier in the year that the pandemic would push Europe’s top economy in to “the worst recession” in its post-war history, ending a decade of growth.
Analysts had expected a slightly smaller contraction of about 9% for the April-June period.
Destatis said efforts to contain the Covid-19 pandemic had led to “a massive slump” in exports and imports, although government spending had increased over the period. The agency also revised its first-quarter data, saying German output declined 2.0% from January to March instead of the previously announced 2.2%.
But the worst pain may already be over.
Thursday’s data “is nothing more than a look in the rearview mirror”, ING bank economist Carsten Brzeski said, adding he expects to see “a strong rebound” in the third quarter.
But the road to recovery will be “uneven” and long, he warned, with government stimulus likely to buoy services and construction at home, while the rebound in manufacturing will depend heavily on foreign demand and how other nations cope with the virus fallout.
For the whole of 2020, the German government forecasts that GDP will contract by 6.3% before expanding by 5.2% in 2021. By contrast, the European Commission expects the economies of France, Italy and Spain to shrink more than 10% this year.
Germany has withstood the coronavirus shock better than many of its neighbours so far. Stable infection rates saw it reopen factories, shops and restaurants from early May, allowing economic activity to pick up earlier than in other European nations.
Germany has also been able to avoid mass layoffs thanks to subsidised shorter-hours schemes, with separate data on Thursday showing unemployment held steady at 6.4% in July, the same rate as June.
Chancellor Angela Merkel’s government, criticised in the past for sitting on fat budget surpluses, has gone to unprecedented lengths to cushion the economic impact from the crisis.
It has ditched its no-new-debt dogma to unleash €130bn in stimulus aimed at spurring investment and consumer spending, including through a temporary cut in VAT.
It has also rolled out huge rescue packages worth more than €1-trillion to shield companies and employees, helping the likes of Lufthansa and TUI Travel stay afloat and preserve thousands of jobs.
Germany’s bounce-back should also get a boost from the EU’s €750bn coronavirus recovery plan, Altmaier has said.
Second wave fears
Better-than-expected business and consumer confidence surveys recently suggested Germans are feeling more optimistic about the future. But concerns have grown over a spike in Covid-19 cases at home and across Europe, partly fueled by summer travel.
As an export powerhouse, Germany is highly vulnerable to virus setbacks in other countries that could lead to renewed shutdowns that again disrupt supply chains and suppress demand.
In April and May, at the height of the global lockdowns, German exports plummeted about 30% year on year.
Germany’s mighty industrial sector, already hurting from US-China trade tensions and Brexit uncertainty, has been especially hard hit. Car manufacturing alone fell 40% year on year over the first six months of 2020, reaching a 45-year low.
ING analyst Brzeski said German exports will take time to return to pre-pandemic levels, leaving the country to rely on domestic demand to power its rebound.
KfW chief economist Fritzi Köhler-Geib said the German economy had a “successful” start to the summer, but the ongoing uncertainty and risks linked to the pandemic should see the recovery “soon slow down again”, she said. “Export-oriented industry, in particular, must expect a strong headwind in view of the continuing high global infection dynamics.”