Economy & Politics

The upswing of the German economy

German exports in particular had recently suffered from the consequences of the corona pandemic - with consequences for the upswing
German exports in particular had recently suffered from the consequences of the corona pandemicPixabay

At first glance, it was a good week for the German economy. The Federal Statistical Office put the fall in economic output in the second quarter at 10.1 percent of gross domestic product – a record figure, but better than the forecasts of the economic research institutes. The employment agency reported an increase in unemployment from 0.1 percentage points compared to the previous month to 6.3 percent – an increase, but typical for July. Inflation fell to minus 0.1 percent in July compared to the previous month – the reduction in VAT seems to have reached consumers. And the ifo Institute announced that the business climate had risen for the third consecutive month – to a level below pre-crisis levels, but it is still the first sign of an upswing.

Economic researchers are now assuming that economic performance will return to pre-crisis levels in two years – it is the best-case scenario for many estimates at the beginning of the crisis.

Cautious outlook for further upswing

The upswing is thus announced, one can conclude. But at second glance, the economy is still in the middle of the crisis, with an unclear outcome. The Kiel Institute for the World Economy (IfW) estimates the loss of economic output in 2020 and 2021 at 400 billion euros.

In any case, forecasts work worse in times of crisis, say economic researchers. Their mood therefore remains subdued. “Yes, it is getting better, we can get out of the very deep valley quickly,” says Stefan Kooths, an economic researcher at the IfW, but adds: “Then the catch-up process should lose momentum.”

Then what does it depend on whether and how fast things continue to improve?

First of all from consumption. Already in May after the first easing, retail sales rose 13.4 percent above the pre-crisis level. Thanks to short-time working allowance and support payments, most Germans had little less money than before the crisis and seemed happy to be spending it again.

The German economy depends on exports abroad like hardly any other economy. Here, too, the development is initially positive. With important trading partners like China, Germany’s economic recovery is months ahead. Other countries in Europe, including important sales and supplier markets for German companies, are also picking up speed again. This strengthens the demand for German exports.

Germans will save more in the future – and travel less

That sounds like an upswing. However, there are some indications that the effects of the crisis will nevertheless make the economy difficult in the long term.

The problem is that people are simply less able to spend their money. That’s why many Germans save their income. The IfW estimates that the savings rate will increase from just under 11 percent to more than 17 percent this year. Travel – both privately and professionally – is changing and decreasing.

Whether consumption across all industries is permanently at the pre-crisis level also depends on whether these behavior changes are permanent. “So the question is whether we will ever reach the pre-crisis levels in these areas,” says economic researcher Timo Wollmershäuser from the Ifo Institute.

And even if the recovery in other countries points to an increase in exports, these are likely to be even longer from the pre-crisis situation. The outlook is subdued in some sales markets, such as the United States. Similar to Germany, US GDP plummeted by ‘only’ around ten percent in the second quarter compared to the previous quarter. But the pandemic there is not under control, which is also burdening the German economy.

Bankruptcy wave possible from autumn

In the long run, the global pandemic development is particularly important for the sale of complex German mechanical engineering products. Without trade fairs and with few trips, it will be harder to sell the products. “You don’t even order them from Amazon. These are products that require a lot of explanation, ”says Kooths. He anticipates a longer slump in investment as a result of the crisis.

Since companies are actually dependent on consumption and exports at pre-crisis level, Kooths, Wollmershäuser and many other economists expect a wave of insolvencies in autumn 2020 or spring 2021. “This happens in every recession. We already had that during the global financial crisis, ”says Wollmershäuser.

With the bankruptcies, capital and jobs were lost – and the productivity of the German economy will also decrease. The only question is how high the number of bankruptcies is.

The first signs are already there: the federal government has suspended the obligation to file for bankruptcy until the end of September. Nevertheless, companies voluntarily register for bankruptcy. According to surveys by the IWH Halle, the number of employees affected by bankruptcy has already risen.

The number of applications could then increase from October. In a survey by the Ifo Institute in June, 21 percent of the companies surveyed replied that the impairments caused by the corona pandemic were “existential”. KfW loans and other state aid measures helped companies to stay afloat. But in the long run they need profits or lenders to make up for the lost profits. Operation cannot be maintained permanently only with borrowed money.

How many of the companies file for bankruptcy also depends on the political aid measures. Instead of aid loans, which are unsustainable in the long term, many companies now need grants to strengthen their equity base. For this purpose, the federal government has set up an economic stabilization fund that also includes silent participations in companies. Some federal states, most recently Baden-Württemberg, set up similar programs. The goal: to get functioning companies through the crisis and preserve production potential.

With all programs, it is important to differentiate who receives state aid. Some companies were hit only by the Corona crisis, others were previously in trouble. How this is to be done with current state capacities remains questionable. Likewise, whether the state can quickly separate from the investments after the crisis and how much influence it should exert. Kooths suggests that instead of state participations in companies, depending on how affected the sector is, all companies should be credited with a load-sharing scheme that is based on the loss of profits on average in the sector.

In both cases, it can happen that a company is saved with taxpayers’ money that it would be better not to save. But the bottom line is that more compensation is needed to keep businesses operating before the crisis.

So the upswing is here. Whether it will last depends heavily on the development of the pandemic. Only the state can prevent major permanent damage.

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