German economy slumps across the board

“German economic output experienced a huge decline in the first quarter of 2020 owing to the COVID-19 pandemic and the measures taken to contain it,” the Bundesbank notes in the current issue of the Monthly Report. The extremely sharp 2.2% quarter-on-quarter drop in gross domestic product (GDP)  after seasonal and calendar adjustment was all the more striking, say the Bundesbank's economists, given that the economy was expanding on a broad front in the first two months of the quarter before the slump occurred in March. Since the containment measures were still in place in April and substantial restrictions are likely to persist in spite of an easing in some cases, the experts expect economic output in the second quarter to be significantly lower still.

According to the report, the pandemic hit economic activity in Germany on a broad front. It has affected many consumer-related service sectors, some of which had to severely curtail or even cease their business activity. This includes the hotel and restaurant sector, large parts of the bricks and mortar retail sector, travel service providers, other leisure and cultural services and passenger transport. Manufacturing was also hampered by the restrictions in Germany. In addition, downward pressure was exerted by the decline in demand from abroad and disruptions to global supply and value chains. As the Bundesbank writes, “Exports of goods fell by more than one-tenth in March alone.” Exports of goods to euro area countries were down particularly sharply. Moreover, exports of goods to the People's Republic of China declined sharply owing to the very early imposition of containment measures. 

Whereas commercial investment in machinery and equipment showed a considerable decline owing to the exceptionally high uncertainty, construction investment continued to improve. Construction activity in Germany was able to carry on in compliance with hygiene requirements, and output is also likely to have been boosted by the warmer-than-average weather.

Plummeting private consumption

According to the Bundesbank, private consumption is expected to have suffered a steep decline the first quarter of 2020. Price-adjusted retail sales picked up slightly on the quarter, in fact, with contrasting developments in various subsectors more or less balancing each other out. While there was a massive slump in purchases of textiles, clothing, footwear and information and communication equipment at retail outlets, stockpiling led to a very strong increase in food sales. Substitution effects in the aftermath of the enforced closure of restaurants may also have played a part in this. Moreover, households bought significantly more goods online and by mail order. On the other hand, in other areas of consumption such as hotel and restaurant services or motor vehicle sales, households tightened their belts considerably. The standstill in the case of other consumption-related services, including hairdressers and passenger transport operators, likewise exerted a strong dampening effect. 

Crisis hitting automotive industry especially hard

The Bundesbank’s experts write that global restrictions due to the coronavirus pandemic have dealt a severe blow to German industry as well. After a good start to the year, industrial output slumped in March 2020, down on the month by 11.6% in seasonally adjusted terms. The automotive industry, where restrictions in Germany and abroad are likely to have caused a partial breakdown of sales channels, was particularly affected. In addition, temporary border closures disrupted international supply chains. It is also conceivable, in view of the rapid economic slump and the sharp rise in uncertainty, that many potential buyers of passenger cars deferred purchases.

Sudden sharp rise in unemployment in April

“The measures to contain the pandemic are having a considerable impact on the labour market,” the Monthly Report continues. The economists point out, however, that the data are still incomplete at present and that it is therefore difficult to assess the extent of the impact, especially with regard to short-time work. Although the number of persons reported as being in short-time work has reached an unprecedented level, it is uncertain how many firms are actually going to make use of this option. The Bundesbank assumes that short-time work will play a much greater role than in the 2008-09 recession, with large swathes of the services sector now affected, whereas the last time around it was predominantly the manufacturing sector that made use of short-time work. The experts also assume that, in most cases, the loss of work per person owing to mandatory business closures will be higher than it was last time, at least in the short term.

In the first quarter, unemployment remained largely unchanged in seasonally adjusted terms, though the reporting dates were also prior to the introduction of the far-reaching contact restrictions. According to the report, in April seasonally adjusted unemployment jumped by 373,000 on the month to 2.64 million, pushing up the standardised unemployment rate by 0.8 percentage point to 5.8%. The leading indicators also point to a dismal outlook for the labour market over the coming months.

Scale and speed of recovery uncertain

Despite the instances of easing that have been initiated, social and economic life in Germany is still far from a state that would previously have been regarded as normal, according to the experts. The available economic indicators such as the Ifo business climate indicator or the GfK consumer climate index are painting a commensurately bleak picture. Although there is currently much to suggest that macroeconomic activity will pick up again over the course of the second quarter as a result of measures being eased, there is still a very high degree of uncertainty about what lies ahead for the economy. This will depend, along with other factors, on the ongoing evolution of the pandemic and the measures taken to contain it. The resultant changes in consumption and investment behaviour will matter as well.