Why there’s hope for Germany’s economy following dismal year

Germany's economy suffered its biggest contraction last year since the 2009 financial crash, as it was hit hard by the coronavirus pandemic, official data showed Thursday.

Why there's hope for Germany's economy following dismal year
Berlin's normally bustling Kurfürstendamm shopping street has been mostly deserted in January 2021. Photo: DPA

Output shrank 5.0 percent year-on-year, as “almost all economic sectors were markedly affected by the corona pandemic”, the federal statistics agency Destatis said.

The downturn ended 10 years of growth, Destatis added, though its figure was better than the government's own forecast, which had anticipated a decline of 5.5 percent.

In 2009, in the midst of a global economic crisis, gross domestic product (GDP) had plunged by 5.7 percent.

“Measured against the original fears after the outbreak of the pandemic, this sad result is also a success in damage limitation,” said Fritzi Köhler-Geib, chief economist at the KfW public bank.

READ ALSO: How coronavirus has pushed Germany into a recession

The 2020 German slump is smaller than others recorded in France, Italy or Spain, where GDP is projected to have declined by 9.3, 9.0 and 11.1 percent respectively, according to European Central Bank forecasts.

The pandemic's first wave caused the worst quarterly drop in GDP on record, when output plummeted 9.8 percent in the three months from April to June.

But the economy recovered, expanding by 8.5 percent in the third quarter, before slowing down again following a resurgence of the virus.

Germany owes much to its robust industrial base, including the car sector and machine makers, even though manufacturing, which accounts for about a quarter of the economy, was particularly hit by pandemic restrictions, Destatis said.

Physical retail trade declined substantially as online trade boomed, the agency said, while restrictions closing hotels, restaurants and bars led to a dramatic decline in hospitality.

Yet, with many businesses shutdown again since November, the 2020 GDP data
“must be seen as a positive surprise,” said Uwe Burkert, head economist at LBBW bank.

Second wave

Like its neighbours, the country of 83 million people has been hit hard by a resurgence in coronavirus cases, prompting the shuttering of bars, gyms,cultural and leisure centres in November, followed by non-essential shops in December.

But unlike during the first wave, the latest restrictions did not close Germany's export-oriented factories or manufacturing businesses, meaning they have had less impact on the economy than earlier in the year.

Industrial orders jumped 2.3 percent in November month-on-month, Destatis data showed, while manufacturing production rose 0.9 percent.

Both indicators have been rising for several months, buoyed by a recovery in demand from China where the virus has been largely contained.

“The German economy was less affected by the second round of restrictions than by the first,” Destatis president Georg Thiel commented.

It means that, while “it now seems likely that GDP will decline in the first quarter of 2021,” according to Andrew Kenningham at Capital Economics, “it should expand rapidly after that as the vaccination programme is rolled out.”

Reason for hope

Looking ahead, the German government is upbeat, having forecast growth of 4.4 percent in 2021 and 2.5 percent in 2022.

But with Covid-19 deaths regularly topping 1,000 a day and vaccines still months away from being widely available, concerns about the virus' impact are mounting.

The German Retail Association (HDE) has warned that the current shutdowns could trigger a wave of bankruptcies, leading to the disappearance of up to 50,000 stores in the months ahead.

READ ALSO: Coronavirus: Can Germany revive its hollowed-out city centres?

In small and medium-sized business, often considered the backbone of the German economy, more than one million jobs are at risk, according to the KfW bank.

Many firms have also complained the financial assistance has been slow to arrive and that calculation rules have changed to their disadvantage in January.

Whereas the government reimbursed affected companies for lost turnover in November and December, future compensation will only cover fixed costs such as rent and utilities.

Anxiety about more transmissible variants of the virus, which first emerged in Britain and South Africa, is adding to the economic uncertainty.

Health Minister Jens Spahn told parliament on Wednesday the current shutdowns would probably be extended into February.

And Chancellor Angela Merkel has warned the country faces “tough weeks” until Easter in early April.

“Extended and stricter lockdowns do not bode well for the economy,” ING economist Carsten Brzeski noted.

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German health agency expects number of Covid ICU patients to rise

The Covid pandemic is continuing to cause problems around Germany, with concerns that the number of patients needing treatment will rise in the coming weeks.

German health agency expects number of Covid ICU patients to rise

In its weekly Covid report, the Robert Koch Institute (RKI) said that confirmed infections appeared to be rising in some German states, and falling in others.

But experts warned that the situation remained tense, with many infections not reported. 

Therefore, in the coming weeks, “hospitalisations, an increase in intensive care treatment and deaths are to be expected, especially among the elderly”, said the RKI.

People over the age of 80 “continue to be most affected by severe courses of the disease”, the experts said in their report. 

The incidence of infections is continuing to rise for this age group, and the number of outbreaks of Covid-19 in medical treatment facilities as well as in old people’s and nursing homes is going up.

READ ALSO: Which Covid rules are likely to return to Germany in autumn?

The number of patients with Covid-19 being treated in intensive care units (ICUs) is also rising slightly. In the previous week, the number was reported to be around 1,330. And on Thursday July 28th, 1,550 people were in ICUs in Germany with 484 receiving ventilation treatment, according to the DIVI intensive care register. 

The number of deaths in connection with the virus is currently around just over 400 per week. The RKI says this trend is a plateau.

When it comes to the overall picture of Covid in Germany, the RKI said there was a “sideways movement rather than a decreasing trend”.

Last week, the nationwide 7-day incidence decreased slightly compared to the previous week. The overall picture shows falling incidences in most western German states and Berlin, with incidences still rising slightly in the other eastern German states and Bavaria.

The RKI estimates there’s been a total of 800,000 to 1.5 million people with Covid (who also have symptoms) in the past week alone in Germany.

Last week experts warned that they expected the Covid situation to get worse in the coming weeks as many schools in Germany return after the summer break.

READ ALSO: Germany’s summer Covid wave set to get worse

The Omicron sub-variant BA.5, which has dominated in Germany since mid-June, has almost completely displaced other variants. It accounts for 89 percent of samples in the past week, the RKI said.

Health Minister Karl Lauterbach warned people against underestimating getting Covid again.

The SPD politician pointed out that it was very easy to become infected with BA.5 – even for those who were infected with a previous type.

He warned that many could become seriously ill or die, plus there’s the risk of picking up Long Covid.

“Therefore, we have to solve the problem not by constant infection, but by better vaccines,” Lauterbach said.

‘Call things as they are’

Lauterbach, meanwhile, defended himself against his choice of words when describing the possibility of a new dangerous Covid variant emerging in autumn. 

In an interview with Bild newspaper in April he said: “It is quite possible that we will get a highly contagious Omicron variant that is as deadly as Delta – that would be an absolute killer variant.”

He was slammed for his dramatic choice of words. 

This week Lauterbach said: “I use few vocabulary that is apocalyptic. But sometimes you have to call things as they are.”

If there were a virus that linked the contagion of the BA.5 variant with the severe course of a Delta variant, “that would be a killer variant”, he maintained.

But he stressed that he had “not said that such a variant is definitely coming, but that we have to be prepared for such a variant”.

READ ALSO: German Health Minister calls on under 60s to get next Covid jab