Impact on the Economy18 Aug 2020
The current situation, the actions of the Federal Government and the economic impact
There is only one word for the overall social and economic development since the beginning of 2020: Rapid.
The way to nationwide contact restrictions – the German Federal Government begins to act early
In January 2020, COVID-19 or the corona virus did not seem to concern us. The reports focused on Wuhan. A city in China. Far away. We became aware when a hospital with 1,000 beds was built in Wuhan within 8 days and the provincial capital with its 11.08 million inhabitants was quarantined. It became quickly clear that COVID-19 should not remain a purely Chinese phenomenon. The first corona case in Germany was reported on January 28, 2020. The authorities reacted quickly and were able to isolate the patient and his contacts. Although only 16 patients are reported in Germany in mid-February, Federal Minister of Health Jens Spahn said the important sentence: "This is a marathon, not a sprint." The Federal Government began learning from developments in China, Spain and also northern Italy, where the numbers of COVID-19 patients rose rapidly and led quickly to an overload of the health system. The weeks in February were used to analyse the virus. Laboratory diagnostics were made available across the country and made billable as a service. At the end of March, the number of COVID-19 patients in Germany began to increase exponentially. The carnival helped as an accelerator. At the time, the clinics were already busy preparing for a significant increase in the number of COVID-19 patients. The number of intensive care beds increased sustainably in the following weeks. Additional breathing apparatuses were procured, staff additionally trained. At the beginning of March, events overturned. On March 11, 2020, the WHO officially declared the previous epidemic a pandemic. At this point, 2,490 people in Germany had COVID-19. 9 days earlier, according to the Robert Koch Institute (RKI), there were only 272. On March 13, our neighbouring countries Denmark and Poland closed their borders. Others followed.
Links and SourcesFederal Government Federal Ministry of Finance Federal Labour Office
Act calmly - create trust
Nationwide contact blocks were imposed in mid-March. Public life came to a complete standstill; schools and universities closed. Events and concerts cancelled. Gastronomy businesses had to close - except for home-delivery service. Only the most important shops for everyday needs remained open. Those who could make it happen, worked from home. 'Social Distancing' was being used in German. A distance of 1.5 meters has become the norm in public spaces. And the citizens went along. The federal government communicated intensively and early on about the COVID-19 outbreak. The Robert Koch Institute provided daily information. Johns Hopkins University figures were also published daily. Politicians who acted calmly as well as scientifically explanatory helped to convey the seriousness of the situation correctly. In any case, citizens wanted to avoid overloading the health system. The flattening of the COVID-19 patient curve was the goal and it was achieved by summer.
Against the background of very low numbers of new infections and a health system that is now well equipped, the Federal Government and the federal states have started to gradually reduce contact restrictions and opening up public life since the end of April. While the drastic measures to control the pandemic have been rolled out nationwide, the process of opening up is now controlled much more by the federal states. On May 6, the federal and state governments agreed that the federal states are now responsible for relaxing the corona restrictions. From now on, the countries themselves will decide on their respective easing measures adapted to regional needs and general conditions and keeping an eye on the COVID-19 infection numbers.
The most important rules and easing measures as of May 6, 2020:
- Wearing mouth-nose protection in parts of public spaces and public transport is mandatory.
- The federal states regulate details regarding the abolition of the mask requirement.
- Contacts should be kept low and constant.
- A minimum distance of 1.5 meters must still be maintained.
- All stores nationwide are allowed to open.
- In the shops strict requirements resp. hygiene, control of access and avoiding queues must be met.
- A maximum number of customers and staff is specified based on the respective sales area.
- The wearing of mouth and nose protection remains mandatory.
Gastronomy and tourism:
- Common hygiene and distance concepts must be maintained.
- Further regulations are a matter of the state.
Requirements for employers:
- Companies in the service sector and in industrial production are encouraged to avoid unnecessary contacts in the workforce and with customers.
- General hygiene measures must be implemented.
- See also SARS-CoV2 occupational safety standard of the Federal Ministry of Labor and Social Affairs (as of April 2020)
The federal and state governments have agreed on a hard upper limit for new infections which applies nationwide and from which more severe restrictions must apply. The federal states must ensure that a consistent restriction concept is immediately implemented in counties or independent cities with more than 50 new corona infections per 100,000 inhabitants within the past seven days. It is therefore necessary to react regionally with restrictions immediately. A new lockdown for the whole country is to be avoided in this way. The federal states are responsible here.
Appropriate measures have now been taken in North Rhine-Westphalia, where the number of new infections in a slaughterhouse rose rapidly to more than 1,500. For the affected districts of Gütersloh and Warendorf, contact restrictions were introduced as in March. Individual districts move now close to the limit value. As a result of the return traffic from vacationers, there is now a greater dispersion. On August 6, the number of new infections in Germany exceeded the 1,000 mark again. A corona test has been mandatory for travelers from risk areas since August.
In addition to the return traffic, the opening of schools is the second major challenge for the federal states. Regular operation should be the rule while observing the distance rules and the hygiene concept. Arrangements are being made for schools to close.
Influence on the German economy
The impact of the global pandemic, the collapse of global supply chains and the significant international decline in economic output are weakening the German economy. It is obvious that the export-driven economy is particularly vulnerable here. The recovery is not only dependent on how successful the domestic economy is starting up and, if necessary, holding its own against further waves of contagion, but also how well other countries get the pandemic under control and stabilize their respective economies.
Gross Domestic Product (GDP)
The gross domestic product (GDP) published by the Federal Statistical Office provides an initial indication for further economic development. In the first quarter, the decrease compared to the previous quarter was already -1.8%. Germany slipped into recession in the second quarter of 2020: -11.7% means a historic slump in economic output.
Gross Domestic Product (GDP, price-adjusted in %)
Source: Statistisches Bundesamt (Destatis)
The German labor market reacted very quickly to the COVID-19 pandemic and the "lockdown". According to preliminary extrapolated data from the Federal Employment Agency, cyclical short-time working benefits were paid for 6.7 million employees in May; in April it was 6.1. The jump to March is clear with 2.46 million. The current figures on short-time work are many times higher than at the time of the financial crisis in 2008/2009.
The number of unemployed rose noticeably from March to April by 308,000 to 2.644 million and caused the unemployment rate to rise by 0.7 percentage points to 5.8%. The increase continued in the further course, but at a slower rate. The number of unemployed at the end of July was 2.91 million and the unemployment rate was 6.3%. At the same time, the companies' demand for new employees continued to decline. The turning point appears to have been reached in July, with 3,000 more jobs registered than in the previous month.
Economoc Indicators Shortly after the outbreak of the pandemic, the most important early indicators made it clear that the impact of COVID-19 on the German economy will be profound. After extensive slumps in the indices in April, the May and June values are now pointing to an improvement in sentiment across the board. Many respondents rated the coming months better than in previous months. Expectations are brightening.
Ifo Business Climate Index The mood of German entrepreneurs was disastrous in March and April. The Ifo business climate index has seen a rapid downturn in these two months, reaching a historic low of 74.2 points in April. The index rose again for the first time in May. The current situation was rated worse, but expectations for the coming months rose significantly. This trend has continued in June when the ifo business climate index rose noticeably from 79.7 points in May to 86.2 points. It was the strongest increase ever measured. In July there was another significant jump, this time by 4.2 points to 90.5. It is above all the increased expectations that have pushed the index higher. According to the Ifo Institute, the economy is gradually recovering.
Ifo Business Climate Index
Source: Ifo-Institut, 2015=100
GfK consumer climate index
German consumers are regaining confidence. After the historic fall in the GfK consumer climate index during the "lockdown" to -23.1 points, an increase is now reported for August for the third month in a row. The consumer climate index is currently trading at -0.3 points.
According to GfK, consumers draw among other things hope from the extensive economic stimulus programs that the German state has launched and from the temporary reduction in VAT that will come into came into force on July 1 as well as the one-time child bonus of € 300. They expect the German economy to recover faster than initially expected. At the same time, there is uncertainty among consumers in view of the very high number of short-time workers and rising unemployment. The fear of losing a job as well as a drop in income further dampens the propensity to consume.
GfK Consumer Climate
Source: GfK SE
ZEW Economic Sentiment
Germany's financial market experts were the first to look more confidently into the future. After the ZEW economic expectations were descending in March and only a value of -49.5 points was reported, the mood brightened in April. Against the background of far-reaching economic and financial policy measures on the part of the federal government, the states and the EU, the financial market players were already optimistic about further economic development in the spring. Nothing changed in this basic attitude in spring 2020. ZEW economic expectations rose for three months in a row, listed at 63.4 points in June, but then fell slightly to 59.3 points in July. The earnings expectations diverge greatly depending on the industry. They are still negative in the automotive and mechanical engineering sectors as well as in the financial sector, while the outlook is comparatively positive in the chemicals / pharmaceuticals, IT and consumer-related services segments. With slight uncertainty, a positive development in GDP is expected in the further course of 2020.
ZEW Economic Sentiment
Estimated economic development in Germany
While forecasts for economic development in Germany were still very uncertain in March 2020, economic data is available in June 2020 that allows a better assessment of the economic situation. Against this background, the German Council of Economic Experts (GCEE) published its economic forecast for 2020 and 2021 at the end of June following the submission of its special report on the “General economic situation in view of the corona pandemic” in March. For the current year 2020, the GCEE forecasts real GDP to decline by 6.5% (calendar-adjusted 6.9%). Noticeable catch-up effects are not expected before the second half of the year. In the following year 2021, positive growth of 4.9% (calendar-adjusted also 4.9%) is expected. Accordingly, German GDP is only likely to return to the level before the COVID-19 pandemic in 2022.
GDP Growth – Economic Outlook for 2020 and 2021
1 – Chained volumes (Reference year 2015), seasonally and calendar-adjusted. 2 – Forecast by the GCEE. Source: Federal Statistical Office, GCEE |20-155-1
Key Economic Indicators Germany
Sources: Federal Employment Agency, Federal Statistical Office, GCEE| 20-251
In March, the Council of Experts presented three scenarios for the further development of GDP. While the baseline scenario (see below) was still the most likely in March, Germany's economic development in recent months has been very similar to the “pronounced V” risk scenario (see below).
In the baseline scenario, the experts assumed that the lockdown would take five weeks and the gradual easing would take another three weeks. In this case, the economic situation in Germany would have normalized in summer 2020. After a noticeable slump in the second quarter, the economy could have quickly kicked in again. A GDP of -2.8% was forecast for the year as a whole. In the baseline scenario, the GCEE had forecast pronounced catch-up effects and positive growth of 3.7% for 2021.
Risk scenario - pronounced V:
In late summer 2020, we know that the lockdown and subsequent easing took longer than expected in March and in the baseline scenario. The pronounced V risk scenario is now the likely scenario for the German economy. In this scenario, as is indeed the case, large-scale production shutdowns take place and the restrictive measures are maintained for longer than planned. In the second quarter, GDP could be 10% below the current level.
Risk scenario - long U:
Basic assumption is that if measures to contain the virus persist beyond summer 2020 and the measures taken by politicians will not be sufficient to prevent the economy from being fundamentally affected by bankruptcies and layoffs, financing conditions would worsen and uncertainties among entrepreneurs and consumers would increase. Negative feedback with the financial markets have to be feared. For this scenario, the experts forecasted a GDP of -4.5% in 2020 and only a very slow economic recovery in 2021 with +1.0%.
Comparison with GDP-Scenarios from the GCEE Special Report
1 – Chained volumes (Reference year 2015), seasonally and calendar-adjusted. 2 – Forecast by the GCEE. 3 – Scenarios from the Special Report March 2020. Source: Federal Statistical Office, GCEE |20-155-2
Federal Government Financial Measures
The Federal Government is trying to counter the rapid economic downturn. To a large extent, it follows the recommendations of the German Council of Economic Experts, which in addition to strengthening the health system and clear communication primarily include maintaining entrepreneurial capacity and stabilizing income. The Federal Government's aim is to contain the slump in economic activity quickly and effectively. It should be avoided that the risk scenarios of the "pronounced V" or the "long U" occur.
In view of this challenge, the Federal Government has put together the largest aid package in the history of the Federal Republic. In addition to providing comprehensive support and ensuring that our health system is able to act, the Federal Government aims to stabilize the economy and preserve jobs.
In spring, the federal government has launched aid programs providing billions of Euros for the German economy. The protective shield for employees and the self-employed is the largest aid package in the history of the Federal Republic. As of April 23, 2020, the volume of budgetary measures totaled EUR 353.3 billion and the volume of guarantees totaled EUR 819.7 billion. The federal government will borrow around EUR 156 billion to finance these programs. The cabinet has already approved the corresponding supplementary budget.
EUR 50 billion were made available in March to help small businesses, the self-employed and freelancers with direct grants. This emergency aid, which grants operating costs for three months and does not have to be repaid, supplements the aid programs that the individual federal states have additionally set up. Furthermore, EUR 7.5 billion were made available for the social security of the self-employed, which is valid for 6 months and for which no financial assessment is necessary. An economic stabilization fund was set up for medium-sized and especially large companies. The fund contains
- EUR 100 billion for corporate actions
- 400 billion euros for guarantees
- The Fonds can refinance KfW programs that have already been approved with up to EUR 100 billion
In addition, a billion-euro aid program to provide liquidity to companies, the self-employed and freelancers has been set up via the state-owned KfW. As of August 11, 2020, companies have already received aid amounting to 66.9 billion euros. Simplified access to short-time work allowance for employees is another help to relieve the burden. Financial bottlenecks quickly put consumers, tenants and companies in a situation where they can no longer fulfill contracts. Therefore, in parallel to the financial measures on March 25, the Federal Government passed the "Law to Mitigate the Consequences of the COVID-19 Pandemic in Civil, Bankruptcy and Criminal Procedure Law" to accompany the financial measures. For example, the insolvency filing requirement will be suspended until September 30th to give more time to companies that get into economic difficulties due to the lockdown. The right of creditors to file for bankruptcy proceedings had also been deferred until June 30,2020. There was also a deferral of payments for basic services and consumer loan contracts. This was to ensure that gas, water, telephone, etc. are not switched off. Leases and tenure were also secured against termination.
In addition to other offers of help from the Federal Government, the sixteen federal states have also launched individual aid programs. The Federal Government and the federal states make weekly adjustments in order to react to the new requirements. With the partial easing from April or May 4, 2020 and the introduction of a mask requirement, the Federal Government is slowly trying to restore a “new normal” and lay the foundation for higher economic activity.
Sources: Federal Government, Federal Ministry of Finance, Federal Ministry of Labour and Social Affairs, Federal Labour Office, Ifo-Institute, GfK SE, Leibniz Centre for European Economic Research
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The spread of COVID-19 and the containment policies being introduced are changing rapidly. While information in the briefing notes is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak. We have provided links to some of these sources, which provide regularly updated information on the COVID-19 outbreak. The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such.