Into the crisis, out of the crisis. He is not entirely wrong with the optimism that our Minister of Economic Affairs spread on September 1st. But the big “V” that Peter Altmaier has just presented will probably not exist. The financial markets, which look far into the future, have actually quickly recovered from the corona shock. You’re betting on better times, when the economy is booming again, interest rates will remain very low for the time being and we will have the virus permanently under control.
But for the economy itself there is no real “V” in sight, ie a recovery that would be nearly as rapid as the previous slump. Instead, we expect German economic output to return to the level at the beginning of 2020 in early 2022. In other words: we will need about two years to compensate for the crash of the two lockdown months of March and April.
GDP Germany, quarterly (change in%)
In a sector of the economy we can actually look forward to a “V”. The German retail sector offset the losses of the two previous months in May and has remained at a solid level since then. Since stores reopened, consumers have been spending again. Above all, however, the boom in online retail has cushioned the slump in sales.
However, consumer spending on services, which is often characterized by close human contact, is only slowly recovering. In view of the recent concerns about the slightly higher number of new infections, some services could even face a setback. It will probably be next year before we can go to mass events again. Fortunately, the current data indicate that the increase in the number of cases, partly due to vacation and party-related reasons, is decreasing somewhat in Germany as well as in the Netherlands, Belgium and Austria.
“Checkmark” instead of “V”
If we add up consumer spending on goods and services, it will probably take until the beginning of 2022 for private consumption to return to its original level. In view of the continued tense situation on the labor market, some consumers will hold back on their spending for the time being, despite the generous short-time working allowance.
So far, the German economy has roughly corresponded to the picture of a “tick” that we presented at the end of March. The steep fall is followed by an ascent, which is initially strong but not V-shaped and then flattens out over time. With the gradual end of the lockdowns and the contact restrictions, parts of the economy such as retail were quickly switched on again after the dramatic slump. Accordingly, the economy was able to bottom out quickly and reach a considerable angle of increase, which, however, remained well below a V.
After the first catch-up effect has expired, a flatter angle of increase is now apparent. In addition, the driving forces behind the upswing are changing. While private consumption is likely to grow only moderately, manufacturing and foreign trade are now recovering. The better economy in China, which has recovered relatively quickly from the pandemic and, as usual, is also providing considerable support to its domestic economy, is contributing to this. However, the return to more normal conditions in industry is likely to take up to two years, with the prospects for the consumer goods industry initially being much better than those for mechanical engineering, given that consumer demand has returned to normal.
Special boom for mechanical engineering
In uncertain times, companies hold back from investing. In the second quarter, German equipment investments plummeted by 28 percent after a decline of 10.4 percent in the first quarter, which was already noticeably affected by the pandemic in March. With us and our trading partners, equipment investments are likely to recover from the shock of the pandemic with a little delay and only gradually. While investments will probably remain comparatively weak in the autumn of this year, they should pick up again noticeably in the course of the coming year. This would then be a third phase of the recovery.
If companies at home and abroad dare to ramp up their investments again after the pandemic has subsided, this could even give German mechanical engineering a small boom for a few years. Because after the experience of this year, many companies will want to restructure their supply chains. In some cases, the production of important preliminary products will move closer to home, in some cases companies will switch to relying on one or the other reserve supplier in addition to the main supplier. If the worst comes to the worst, they can step in should a supply chain be interrupted. In addition, there is general pressure not to be too dependent on China. All of this can mean that production facilities have to be set up or expanded and correspondingly equipped with machines.
Much depends on our ability to get the pandemic under control and the US not fully returning to the trade wars of 2019. Given these prerequisites, it becomes apparent that Germany can experience a strong upswing that will flatten out over time. After a decline in German economic output of around 6 percent this year, we expect growth of 4.6 percent in 2021 and 2.4 percent in 2022. It won’t be quite enough for a capital “V”. If you look at the figures from the Ministry of Economic Affairs, which do not deviate far from our forecasts, the impression arises that even Altmaier did not mean the “V” quite literally.
Holger Schmieding is chief economist at Berenberg Bank. He writes here regularly on macroeconomic topics. More columns by Holger Schmieding can be found here