Economy & Politics

GDP How economists assess the economic slump

Clearance sale due to business closure. In many places the retail sector is suffering from the consequences of the lockdown. Many merchants experience a sharp drop in sales, businesses give up while online trading flourishes.imago images / Winfried Rothermel

German gross domestic product slumped by a full five percent last year, according to calculations by the Federal Statistical Office. It is therefore clear: The Corona crisis has plunged the German economy into a deep crisis that, according to the Federal Statistical Office, affects almost all economic sectors.

The industry suffered above all from the disrupted or completely collapsed international supply chains in the first half of the year. In the manufacturing sector, economic output fell by 10.4 percent compared to 2019, in the manufacturing sector excluding construction by 9.7 percent. The catering trade hit the restrictions on infection protection and temporary closings heavily: In trade, transport and the hospitality industry, economic output fell by 6.3 percent.

The only sector that the corona pandemic does not seem to have harmed is the construction industry: it even increased by 1.4 percent in the crisis year. In the corona crisis, consumer-related service providers are also affecting economic sectors that are otherwise less susceptible to fluctuations and have a stabilizing effect on society as a whole, says Stefan Kooths, Director of the Research Center for Business and Growth at IfW Kiel.

Slump during the financial crisis to the boom

In view of the historical extent of the crisis, a comparison with the economic and financial crisis of 2008/2009 is obvious. At the time, the economic slump was even greater, with GDP falling by 5.7 percent. And yet Kooths states: “The decline in gross domestic product by 5.0 percent marks the worst economic crisis since the existence of the Federal Republic.” Although the slump during the recession in 2009 was numerically a little higher, the shock of the financial crisis was the German one Economy hit during the boom. In contrast, the economy as a whole was at normal capacity at the beginning of 2020 after two years of downturn, and the industry was already in recession. “The declining economic output has thus translated 1: 1 into underutilization of production capacities,” says Kooths.

The recession in the wake of the Corona crisis is fundamentally different from that in the wake of the financial crisis, notes Timo Wollmershäuser, Head of Economic Research and Forecasts at the Ifo Institute: “The causes were completely different and also the speed with which the economy was developing cooled down and plunged into recession was quite another ”. The slump in the corona crisis happened much faster than in the financial crisis. “At that time the economic crisis was slowly brewing,” says Wollmershäuser.

Oliver Holtemöller, Deputy President of the Leibniz Institute for Economic Research Halle (IWH) is also convinced that the recession of 2020 cannot really be compared with the financial crisis of 2009. These are completely different processes. “For the German economy, the financial crisis was primarily a collapse in demand from abroad, because there was no property price bubble in Germany before and no systemic banking crisis during the financial crisis,” says Holtemöller. The economic structures remained largely intact. It looks completely different now. “The slump came very quickly and was not triggered by previous undesirable economic developments,” says Holtemöller.

Economic development depends on the infection rate

Hopes are now on the current year and that the infection situation will soon ease as a result of the vaccination campaign. But the recent, tough lockdown hits the economy again. It is clear that the recovery process in the German economy has been interrupted as a result of the second wave of infections, says Stefan Kooths. For the start of the current year, there are even signs of declining economic activity.

The infection situation is decisive for how the economy develops: “If the vaccines keep what they promise, economic output will pick up sharply from spring onwards as the infection protection measures are then relaxed,” says Kooths. In particular for the consumer-related economic sectors, the situation will “brighten up significantly, especially since private households have been holding back purchasing power on a massive scale for a year, which should quickly translate into demand,” said Kooths.

For Wollmershäuser, an important difference between the economic recovery from the Corona crisis and that from the financial crisis is government assistance. Economic policy then reacted much later and more slowly than it does today. “We accompanied the current crisis at record speed with economic policy aid and support measures,” he says. That took forever and contributed to the fact that the economy only recovered very slowly.

Rapid recovery possible

It was already possible to observe last year that the economy recovered at an incredible rate, says Wollmershäuser. “In the areas in which the light was switched off, it was switched on again and the activity was back more or less as quickly as it was gone.” That was one of the positive findings of the economic movements last year: “We can assume that it will go up again at a similar speed, ”said Wollmershäuser. It was different during the financial crisis: “Both the decline and the recovery took much longer,” he says. It was not possible to lift a shutdown, but had to stabilize the banking system first.

The economists agree: the economic recovery could be faster than the 2008/2009 financial crisis. After financial and banking crises, recovery generally takes significantly longer, says Holtemöller. It was seen in the second quarter that many activities come back very quickly when it is possible again. “This will also be supported by the fact that private households have increased their savings overall because there is a lack of consumption options,” says Holtemöller. “Some of these additional savings should be reversed once the epidemic has been contained.” Kooths also predicts: “If the corona pandemic is overcome in the coming months, the current economic crisis can be overcome much faster than the Great Recession.”

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