Germany has been in the “lockdown light” since November 2nd: restaurants are closed again, as are leisure facilities and cultural establishments. Hotels are only allowed to open to non-tourist guests and stricter contact restrictions apply. Now the restrictions are to be extended and some new ones are to be added. Numerous companies suffered from the first lockdown in spring.
But the situation in the “lockdown light” is different: the financial reserves of many companies have already shrunk during the previous months of the pandemic. At the same time, many cuts are not as sharp as in spring: the retail trade is allowed to remain open and there have been no drastic problems in the international supply chains like in spring so far.
Back to the recession
Germany’s economists disagree on whether the economy will fall back into recession. One speaks of this when the gross domestic product falls in two consecutive quarters.
“What has now been decided is really a lockdown light compared to spring,” says Claus Michelsen, head of the economic policy department at the German Institute for Economic Research (DIW). “Compared to neighboring countries such as Austria or France, which have decided to make very tough cuts, this is something for the German economy that we can get away with much more lightly.” Recession relapsing.
“The extension of the partial lockdown is delaying the upswing and prolonging the crisis,” says Gabriel Felbermayr, President of the Institute for the World Economy (IfW). Compared to the third quarter, the fourth quarter of 2020 will at best bring about stagnation in gross domestic product.
Michael Grömling, head of the research group Macroeconomic Analyzes and Business Cycle at the employer-related Institute of the German Economy (IW), assumes that the economy will “still make ends meet” in the fourth quarter. “I’m more concerned about the first quarter of next year,” he says. He assumes that there will be many political and infection-related restrictions in the first few months of the new year.
Not comparable to spring
The expansion of the measures into December increases the risk that economic output will decline slightly in the fourth quarter, predicts Torsten Schmidt, Head of the Competence Area Growth, Business Cycle, Public Finance at the RWI – Leibniz Institute for Economic Research. But even then the situation cannot be compared to spring, says Schmidt. “At that time, large parts of the global economy went into lockdown at the same time, so that not only domestic demand but also demand from abroad collapsed,” he says. “This time, large parts of the global economy – outside of Europe – are still in the recovery phase.”
This is also indicated by the current RWI / ISL container throughput index, which is at a record level. “The recovery in world trade should support German exports,” says Schmidt. He also assumes that domestic demand will not decline as sharply as in the spring, since most shops are still open.
Grömling sees another difference to the lockdown in spring: “What had a positive effect in spring is the look ahead,” he says. At the time, people were confident that the situation would ease in the summer months. Now you have the entire winter ahead of you. “The positive thing is certainly that the near availability of a vaccine opens the medium-term door a little wider than in winter,” says Grömling. In the spring, a “completely new, confident perspective will emerge”, according to the IW economist.
Different effects for different industries
Michelsen points out that the restrictions have heterogeneous effects. There are areas such as food retailing that are practically not affected by the “lockdown light”. Personal services are accordingly harder hit.
The restrictions are also likely to hit the already ailing catering and entertainment industries particularly hard. “Sales there are likely to have plummeted,” says Michelsen. November and December are particularly high-turnover months in the catering and entertainment sectors. “These industries are hit hard because they lose large parts of their annual business,” says Michelsen. “Half of the losses that occur are in these areas.”
Industry gets through the lockdown better
RWI economist Schmidt also assumes that the partial lockdown will primarily affect the hospitality industry, the hotel industry and tour operators. “For many of the businesses affected, the situation is likely to threaten their very existence if the announced state aid is not paid out quickly,” says Schmidt. After the first lockdown, many companies and the self-employed complained that the promised aid had not been paid out or was paid too late.
Felbermayr also sees these industries in a critical position. Felbermayr predicts another massive slump in social services, the event industry, gastronomy and tourism in November and December, albeit from a lower level. “Every week that a restaurant has to close longer, the financial situation in the company worsens,” says Grömling. This also has an impact on suppliers. The specific effects there are still difficult to assess.
The industry, on the other hand, will get through the second lockdown much better than through the first one in spring, says Felbermayr. Another good news is: “After the break-in, there will be a stronger rebound than was expected before the second lockdown, following initial success in combating the pandemic, for example through vaccinations.”
The lockdown also affects the labor market. It is assumed that there will be no new hires and that there will also be a slight reduction, says Michelsen. Short-time working is also likely to increase significantly again: “We are assuming that this will affect well over three million people again,” says Michelsen.
Grömling differentiates between the effects of the political lockdown and the natural effects of the wave of infections. For example, many, he says, would not go to restaurants even if they were open.
DIW economist Michelsen considers the government’s measure to reimburse three quarters of sales to be sufficient to ensure the survival of the companies. But it is not what the companies would generate and has a strong impact on profits and losses. “Companies will likely continue to drain their equity reserves and one can only hope that the difficulties will not become too great,” he says.
IfW calls for corporate aid to be exceeded
Some aids, such as short-time work benefits or liquidity assistance from the development banks, have been introduced well, and their extension is sensible and decided, according to Felbermayr. However, he calls for a revision of corporate aid, which provides for grants instead of loans. “Instead of always new ad hoc measures, a system is needed that will also support the next wave or crisis,” says the IfW President. The aids should not be tied to sales; that leads to incorrect control, creates “very different effects in different industries, and in the end is too expensive”, says Felbermayr.
The IfW therefore proposes that corporate aid should be based on operating surpluses and that operating surpluses lost to companies should be replaced on a pro rata basis. “However, it should be based on industry averages, so that the individual companies have incentives to do everything they can to compensate for the slump in sales with new ideas,” he says. Such a system reduces the risk that zombie companies will come about, “because whoever did not achieve an operating surplus in the previous year will not receive any compensation”. Furthermore, this system does not discriminate between debt and equity, as is the case with bridging aid.
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