Economic Outlook - Germany
Economists predict that Germany will experience an economic recession post-COVID 19, leading to between 2.8% and 5.4% shrink in the GDP, but is expected to recover and experience growth of between 1% and 4.9% depending on whether the recovery will be V-shaped or U-shaped. In efforts to cushion the economy from the impacts of the pandemic and facilitate recovery, the country has approved a €750 billion economic stimulus package.
Current Situation in Germany.
- Currently, Germany has registered over 57,000 infections and about 455 deaths from the corona virus. The country is in a virtual lock down.
- Data published in mid-Match reveal that the private-sector business activity and general German business morale have been falling to their lowest levels since the last global financial crisis of 2008-2009.
- The data also show that one in five companies in Germany sees itself at a serious risk of insolvency.
- Most of Germany’s companies in the manufacturing sector are export-oriented. They are likely to be most affected by weak global demand and supply chain disruptions.
- On March 13, 2020, Germany’s Economic Minister announced that Germany plans to expose business impacted by negative economic activity to tax breaks, export credits, and guarantees.
- The actual damage caused by the corona virus to the German economy remains unknown at present because the same has not been reflected in the available economic indicators.
- The economic consequences will also depend on the further development of the pandemic (which remains uncertain), and to a greater extent on the measures taken by the country to contain the virus.
- According to forecasts, the corona virus will most likely dampen economic activity in Germany in the first half of the year, and followed by catch-up effects, giving rise to a pronounced V-shape post-pandemic recovery in this year.
- The SVR expert panel central outlook is based on predictions that if economic activities ‘normalize by summer’, then Germany will experience a 2.8% drop in the Gross Domestic Product (GDP) in 2020.
- If it so happens, a slow period characterized by delivery problems for intermediate goods, cutbacks on spending and a decline in domestic economic activities, among others, will be followed by a 3.7% expansion in 2021.
- They further argue that a deeper 'V,' which implies extended long periods of isolation or halts in production, could lead to a deeper slump of 5.4% in GDP.
- The deeper ‘V’ scenario in the economy is associated with a growth of 4.9% in Germany’s GDP.
- In a “U”-shape scenario where contact restrictions and production halts continue beyond summer, Germany’s GDP is predicted to drop by 4.5% in 2020.
- It will be followed by economic recovery in 2021 but will grow by just 1.0% during the year.
- Other economists believe that a U-shape recovery is more likely in Germany’s case as the country draws about 30% of its GDP from the manufacturing sector. So maybe the case because the manufacturing sector is still in the contraction stage and may be slow in recovering, given that it is mostly export-oriented.
- Economists' outlook of a U-shaped recovery is anchored on their perception of very low visibility on the effectiveness of alternative policy interventions that have been employed.
- Additionally, supply chain disruptions could get worse by defaults in the upstream sectors, which is more likely as demand fallout worsens amidst expectations of more extended periods of lock down and social distancing restrictions.
Post-Virus Economic Stimulus Funding
- As experts predict a recession as an aftermath of the COVID 19 in most developed countries, including Germany, measures to spur spending are being put into place to accelerate recovery.
- Germany, on March 23, 2020, announced that it would adopt a €750 billion worth of economic stimulus funding. Chancellor Angela Merkel approved the same as part of the ruling coalition's strategy to weather the economic storm caused by the pandemic.
- In the stimulus package, €156 billion in debt will be directed towards financing higher social spending, while self-employed people will benefit from a €50 billion liquidity fund for self-employed people.
- €600 billion has been set aside for rescue funds in the form of guarantees, Development bank KfW loans and equity stakes in companies.
- €500 billion will be availed through the state's KfW bank to boost the liquidity of German companies.
- To accommodate the stimulus package, the chancellor has suspended her government's commitment to a balanced budget, which caps the federal budget deficit to 0.35% of GDP.
- The country, through its parliament, has given the green light to a corona virus rescue package amounting to €1.1 trillion, which will be used to create an "economic stabilization fund" to cushion the economy from the effects of the COVID 19 pandemic.
- The government has also committed to boosting investments by €3.1 billion per year between 2021 and 2024.