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German economy on recovery path following historic slump

The coronavirus pandemic caused a historic decline in economic output in Germany, writes the Bundesbank in its most recent Monthly Report. After seasonal and calendar adjustment, gross domestic product (GDP) fell by 10.1% quarter-on-quarter in the second quarter of 2020, according to the Federal Statistical Office. The Bundesbank economists explain that the depth of the collapse in economic activity was unprecedented, but that the measures taken to contain the pandemic meant that so was its pace. 

At present, however, the economy is on a recovery path and is expected to grow steeply in the third quarter. The economic recovery began back in May after the first easing of containment measures. “Current indicators suggest that this upward movement is continuing during the summer months”, the Bundebank’s experts explain. Expansionary monetary and fiscal policy measures, such as the economic stimulus package recently adopted by the Federal Government, provide additional support to the economy. The Bank’s economists nevertheless point out that the German economy will still fall considerably short of its pre-crisis level for some time to come.

Massive drop in private consumption

Private consumption is likely to have shown a massive drop in the second quarter, according to the Monthly Report. Consumption expenditure in the areas affected by temporary contact restrictions and uncertainties fell particularly sharply, with the hotel and restaurant sector hit especially hard. On an average of April and May, real turnover declined by just under two-thirds compared with the first quarter. Customers also held back on new car purchases. In the second quarter, car registrations fell by just over one-third compared with the previous quarter. In addition, the Bundesbank’s experts expect a dramatic decline in private expenditure on travel and other leisure and cultural services. By contrast, real retail sales were very robust during the coronavirus crisis. Sales in the bricks-and-mortar retail trade with textiles, clothing and footwear fell abruptly and on a massive scale as a result of measures to curb the spread of the virus. However, there was an increase in online and mail order business and the sale of food and beverages.

Short-time work dampens unemployment and employment

“The coronavirus crisis took a large toll on the labour market in the second quarter,” the Bundesbank reports. Employment fell sharply over the course of the reporting quarter and unemployment grew rapidly. “However, measured against the depth of the economic slump, these adjustments were fairly modest.” The Bundesbank’s experts attribute this to the massive reductions in working hours, in particular. Widespread take-up of short-time work schemes had stabilised both employment levels and incomes. According to data from the Federal Employment Agency, 6.7 million persons used the short-time work scheme in May, equivalent to one in five employees subject to social security contributions. In addition, the average reduction in working hours, at 44%, remained comparatively high, which means that the volume of work lost corresponded to 2.9 million full-time employees.

The increase in unemployment caused by the coronavirus crisis did not continue towards the end of the period under review. Although the number of persons officially registered as unemployed was up sharply in April and May, the rise had already flattened significantly in June. In July, 2.92 million persons were registered as unemployed, 659,000 more than in March, when numbers were not yet significantly affected by the pandemic. This corresponds to an increase in the unemployment rate by 1.4 percentage points to 6.4%.