Corona pandemic causing German economy to slide into pronounced recession

Germany is facing unprecedented challenges as a result of the rapid spread of the coronavirus pandemic, according to the Bundesbank’s latest Monthly Report. It is the healthcare system that has the key part to play. The measures taken so far have been aimed at containing the number of infections so as not to place too great a strain on the healthcare system. In the opinion of the Bundesbank’s experts, however, they will also have massive implications for the economy. They regard a slide into a marked recession as being unavoidable. An economic recovery would set in only when the pandemic risk had been effectively brought under control. Against this backdrop, economic developments are, in their words, characterised by unprecedented uncertainty.

The German economy was making a positive start to the year. The hitherto weak pace of industrial activity picked up at the beginning of 2020, the Bundesbank writes in the current issue of its Monthly Report. Industrial output was up strongly and the orders situation had shown a considerable improvement. According to the Ifo Institute, business expectations in manufacturing were pointing upwards well into February. Domestic economic activity, too, remained intact early in the year. This was indicated by the perceptible rise in retail sales in January and by a strong upturn in the construction sector, which was favoured by the mild weather. “This overall picture suggests that the two-speed growth in the German economy is gradually receding and that the underlying trend, which was very weak before, is becoming stronger again,” states the Monthly Report. This development has been abruptly interrupted by the pandemic.

The Bundesbank assesses the impact of the pandemic on the German economy – at least for the coming months – as severe. The data for most economic indicators were collected before the worldwide escalation of the health risk and therefore reflected the situation prior to the coronavirus outbreak. Current surveys suggest, however, that German firms are now suffering considerably under the effects of the pandemic. The consequences of the pandemic are expected to have a massively detrimental impact on economic output at least in the first half of the year, write the Bundesbank’s experts. Economic activity is likely to decline considerably in many sectors, probably resulting in a perceptible underutilisation of capacity in the economy as a whole.

Many-layered obstacles facing the German economy

The pandemic and the measures adopted to contain it will hit the German economy through a variety of channels, write the Bundesbank’s economists. First of all, direct economic effects will become apparent in Germany itself. In this respect, it is likely to be the more domestically oriented, consumer-related services sectors that will be most severely affected. In the estimation of the Bundesbank’s economists, hotels, restaurants and catering services, the entertainment industry as well as trade fair operations and airlines are likely to suffer very strongly from declining demand and precautionary closures.

Besides this, other businesses, too, will be afflicted by a potential losses of work and sales due to protective and precautionary measures, such as closures of schools and child day care centres. Added to this will be external knock-on effects which will chiefly hit export business and thus industry. Furthermore, the cutback in production in countries that are particularly affected means that there will be the risk of supply shortages for key inputs. This might lead to production bottlenecks in Germany, too, even if there should be demand for the goods to be produced. All of the cited obstacles can trigger negative confidence and second-round effects in Germany, write the Bundesbank’s economists.

Adopted monetary and fiscal policy measures and extensive social security system create confidence

These knock-on effects are nevertheless being countered to a certain extent by Germany’s extensive social security system, the accommodative monetary policy measures adopted by the Eurosystem as well as the fiscal measures taken by the Federal Government. These are supporting employees' disposable incomes and the solvency of affected enterprises. Furthermore, they are creating confidence that the economic fallout from the crisis can be managed for society, the economy as a whole and for each individual. Above and beyond that, the Federal Government has announced additional measures to boost economic activity if the economic slowdown were to become entrenched. “Germany’s public finances are well equipped for this,” write the Bundesbank’s experts.