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COVID-19, GDP and the state of play for Europe’s largest economy

Jill Petzinger
·Germany Correspondent, Yahoo Finance UK
·5-min read
German Economy Minister Peter Altmaier wearing a face mask presents the government's updated economic outlook for 2020 in Berlin, Germany, September 1, 2020. Photo: Reuters/Hannibal Hanschke
German Economy Minister Peter Altmaier wearing a face mask presents the government's updated economic outlook for 2020 in Berlin, Germany, September 1, 2020. Photo: Reuters/Hannibal Hanschke

Europe’s largest economy has been showing positive signs of recovery from the pandemic but optimism is not high for 2021.

This week, the German government slashed its tax revenue forecast for next year and has committed to additional borrowing in 2021. Meanwhile, Finance minister Olaf Scholz told Reuters that the economy won’t return to pre-crisis levels until the start of 2022.

The finance ministry said on Thursday (10 September) that it expects overall tax income of €772.9bn (£716bn, $916bn) in 2021, almost €20bn less than its previous estimate.

“We can’t save our way out of the crisis,” finance minister Olaf Scholz said, noting that the tax revenue drop was related to the government’s stimulus spending. However, he added that there are “many signs that the worst is behind us.”

His words echo those of economy minister Peter Altmaier, who said last week that “in comparison with many other European industrial countries…think of Great Britain where the recession was twice as bad as in Germany... we have succeeded in preserving the substance of our economy and keeping jobs.”

READ MORE: Germany predicts better-than-expected 2020 GDP

German GDP contracted by 9.7% in the second quarter of 2020, compared with the same period in 2019. However, the government recently revised its forecast for 2020 to a decline of 5.8%, a more optimistic outlook than the previous forecast for a 6.3% contraction.

The latest revision puts the 2020 GDP almost on par with the 5.7% GDP contraction in 2009, at the height of the financial crisis.

“The recession in the first half of the year was less severe than we had feared,” Altmaier said. Post-lockdown recovery is going “faster and more dynamically than we dared hope,” he added.

However, Berlin is more pessimistic about 2021, forecasting growth of just 4.4%, down from its previous expectation of 5.2%.

Output in the manufacturing sector increased for the third consecutive month in July, its 1.2% rise was much lower than the May and June surges.

“The improved mood among companies and the reduction in short-time work suggest that the recovery process will continue in the coming months, although it may take some time,” the federal economics ministry said.

Automotive sector struggling

The car sector saw a 7% output increase in July, but is still 15% under its pre-pandemic level. The German Economic Institute warned that the car industry is not the growth engine of the German economy in its current ailing state.

While the government has earmarked billions to support the car industry, which employs around 900,000 people, the focus of that support is on technology, the switch to green mobility, and buyer premiums on electric cars.

READ MORE: German car chiefs demand more aid amid COVID-19 slump

To the dismay of automotive chiefs, who are battling over-capacity and anxious for demand to pick up, Berlin has so far not agreed to fund buyer premiums on petrol and diesel cars.

Politicians and industry bodies are warning of mass job layoffs in the automotive sector. Already pre-pandemic, the car industry was suffering, and planning job cuts as part of overall cost-cutting plans. On Friday, Volkswagen-controlled lorry maker MAN announced it will cut up to 9,500 jobs.

Audi (NSU.DE) plans to axe 9,500 jobs in Germany between now and 2025, while rival Daimler (DAI.DE) announced in November 2019 that it would cut around 10,000 jobs worldwide by 2025 as part of its cost-saving strategy. BMW (BMW.DE) also plans to get rid of some 6,000 jobs.

Like most of its EU neighbours, the country is also experiencing a second wave in COVID-19 cases — although the death toll, at around 9,300 is significantly lower than in Spain, France, Italy, and the UK.

While a repeat of the nationwide lockdown is highly unlikely, a second surge in infections has stoked concerns about the damage that potential small or local lockdowns or the consumer insecurity will do to their business in the second half of the year.

Borrowing to cushion the blow

Meanwhile, the German government is spending billions to try and lessen the impact of the pandemic on its companies and their staff. After lifting its constitutional debt brake earlier this year to fund the multi-billion-euro stimulus plan — it will borrow around €218bn this year— Scholz said this week that the government will need to take on more debt in 2021 as well.

A key part of Germany’s stimulus effort is the ‘Kurzarbeit’ short-hours work program, which it will now extend until the end of 2021. The scheme was credited with helping Germany recover after the financial crisis, as it avoids mass layoffs and helps companies ramp up once the economy improves.

The Ifo institute said that the number of companies still reliant on the furlough program had dropped to 37% in August, from 42% in July. The industrial sector is still heavily dependent on the scheme, however, with 80% of metal producers still on short-time hours, and 65% of companies in the automotive industry.

Germany’s labour bureau reported a slight increase in the unemployment rate in August, to 6.4%, from 6.3 % the month before. But, it noted that unemployment normally rises slightly in August, and the uptick was not related to the coronavirus pandemic.