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Economic recovery clearly losing momentum

“Economic output in Germany is likely to have risen sharply in the third quarter of 2020,” the Bundesbank writes in its latest Monthly Report. As measured by quarterly gross domestic product, the German economy may have already recouped slightly more than half of the dramatic losses sustained in the first half of the year. Nevertheless, there is still likely a shortfall of around 5% compared with the pre-crisis level of the fourth quarter of 2019. The main reason for the recovery was the sharp rebound in the second quarter after the economy had bottomed out in April. As things currently stand, the economic recovery is likely to continue in the current quarter, but at a considerably slower pace.

Sentiment in industry brightens

According to the Monthly Report, industry made a notable recovery up to July following the particularly severe slump in the second quarter. Although the recovery took a brief break in August, on an average of July and August industrial output rose steeply compared with the strongly depressed second quarter (+13.5%). Nevertheless, it was still just over one-tenth below the pre-crisis level of the fourth quarter of 2019. New orders increased further, however, almost returning to pre-crisis levels. 

While sentiment amongst industrial enterprises brightened somewhat according to the ifo Institute survey, in September it deteriorated slightly among service providers for the first time since the spring, the Bundesbank reports. The recent sharp rise in the number of infections and the resultant tightening of containment measures in some regions is likely to weigh on sectors such as the hotel and restaurant trade in particular. The Bundesbank’s experts assume that economic output will probably show only a relatively small rise in the current quarter.

Employment continues to rise slightly

The slight recovery in the labour market has continued towards the end of the period under review, according to the Monthly Report. For the second time since the start of the pandemic, there was a seasonally adjusted month-on-month rise in employment in August. Although short-time work has now fallen sharply, it is still being used on a considerable scale. Following the peak of just under 6 million in April, the number of short-time workers fell by almost 30% to 4.24 million in July according to an initial estimate by the Federal Employment Agency. “At that time, around one in eight employees subject to social security contributions was still in short-time work,” the authors state. As there was also a fall in the average work time lost per short-time worker, the volume of labour lost had already shrunk by 44% compared with the peak in April.

Consumer prices down slightly

As explained in the Monthly Report, consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) fell slightly in September. Energy declined markedly owing to lower oil prices, and food prices were likewise down. Annual HICP inflation was 0.4% lower than in the previous year and, excluding energy and food, dropped from 0.6% to 0.3%. Owing to crude oil prices declining again recently and base effects, the Bundesbank’s experts assume that in the remaining months of 2020 headline inflation will be significantly down on the year. With VAT rates scheduled to return to their previous levels in January 2021, inflation is then likely to become positive again and from the second half of the year the Bundesbank’s economists expect inflation rates to be significantly higher than 2%.