Germany set to see 6.3% drop in GDP due to coronavirus, government warns 

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The German economy will suffer the biggest slump in its history this year over the coronavirus crisis, the government warned today, pushing Europe’s top economy into a painful recession.

German gross domestic product (GDP) is expected to shrink by a record 6.3 per cent as demand for exports plummets and lockdown restrictions weigh on domestic consumption, Economy Minister Peter Altmaier said in Berlin.

A group of leading economists have also Germany will suffer a deep slump in the first half of this year but should rebound relatively quickly from the disruption of the virus outbreak.

The German Council of Economic Experts predict that the economy will shrink 2.8 per cent for the full year and rebound next year with growth of 3.7 per cent, although their report issued on Monday acknowledged a high degree of uncertainty about the length of the restrictive measures that have shut down much of the economy.

It came as German authorities suggested the tough lockdown measures could have to be re-imposed after the infection rate increased again. 

‘We will experience the worst recession in the history of the federal republic’, which was founded in 1949, Altmaier said.

‘The effects of the coronavirus pandemic will push our economy into a recession after 10 years of growth’, he added.

This year’s forecast drop in GDP is worse than during the global financial crisis in 2009, when Germany’s economy contracted by more than five per cent.

If the government’s projection is confirmed, 2020 will mark the biggest contraction since federal statistics authority Destatis began keeping records in 1970.

The government offered a glimmer of hope however, predicting that the economy would bounce back in 2021 and grow by 5.2 per cent as the virus impact wanes and businesses reopen.

Altmaier pointed out that the global economy as a whole is expect to tip into recession as the world battles the coronavirus fallout, with the International Monetary Fund predicting a worldwide contraction of 2.8 per cent in 2020.

Export champion Germany in particular will feel the pain from disruptions to supply chains and lower demand for made-in-Germany goods from abroad, he said.

Exports are expected to plunge by 11.6 per cent in 2020, according to the economy ministry.

Job fears and coronavirus restrictions that have kept shops and entertainment venues closed are set to weigh heavily on demand at home too, dealing a blow to the key growth driver of domestic consumption.

International demand and supply shocks will also sap appetite for producer goods in Germany, Altmaier said.

Overall, Germany’s imports are slated to fall by just over eight per cent this year – slightly narrowing the nation’s famously massive trade surplus as exports fall faster.

The base scenario is a V-shaped recovery, with a sharp downturn and quick rebound. 

Member economist Volker Wieland of Frankfurt’s Goethe University said that the downturn would be ‘deeper but not longer’ than the recession following the global financial crisis a decade ago with a steep fall over the first six months followed by recovery.

‘It is not like a war where the capital stock has been destroyed,’ meaning many businesses could quickly resume operations, he said, conceding that ‘the uncertainty is immense.’ 

The worst of the virus impact will hit Germany in the second quarter, Altmaier said, before a rebound is expected to get under way.

Economic institutes recently forecast that Germany’s GDP would shrink by nearly 10 per cent between April and June, in what would be a historic low.

The dire outlook is set to leave its mark on the country’s employment levels.

Germany has long enjoyed record-low unemployment at around five per cent, but this is expected to climb to 5.8 per cent this year.

To help cushion the blow for companies and workers, the German government has unveiled a massive rescue package worth over one trillion euros.

It includes state-backed loan guarantees, direct cash injections and schemes to put workers on reduced hours to avoid layoffs.

Altmaier said the economy would gather steam as the coronavirus restrictions are gradually lifted, with Germany taking the first cautious already by reopening some shops and schools.

But Altmaier warned against acting too hastily.

‘We can’t risk a second wave of infections,’ he said, adding that he was in favour of a step-by-step approach ‘if the [infection] numbers support it’.

‘This is a test of endurance,’ he said. ‘We can’t put the success we’ve achieved at risk.’

Germany has seen a worrying rise in its coronavirus infection rate after becoming one of the first countries in Europe to start easing lockdown measures.

The country reported 1,304 new cases of the virus on Wednesday – up from 1,144 on Tuesday and 1,018 on Monday – a week after non-essential businesses were allowed to reopen.

The data will be closely watched amid fears of a second wave of infections and deaths in Europe – already the world’s hardest-hit region – as leaders are forced to end lockdowns to salvage their battered economies before a vaccine is available. 

Germany could have to re-impose tough lockdown measures after the infection rate increased when restrictions were eased.

The virus reproduction rate (know as ‘R’) rose back to 1.0 on Monday, meaning that each patient is infecting one other person on average. 

The rate, which had previously fallen as low as 0.7, is closely watched in Germany where officials say it must stay below one in order for normal life to resume. 

Yesterday it fell back to 0.9, but politicians including Altmaier, have warned of a second lockdown if there is a new wave of infections.

Angela Merkel herself has urged Germany’s 16 states not to hurry into easing lockdown restrictions, after some shops were allowed to re-open last week. 

Germany’s latest figures today showed a slight rise in new cases, with 1,304 new infections after 1,144 yesterday. 

The rise from 156,337 cases to 157,641 is a 0.8 per cent increase, the third day in a row that the figure has been below one per cent.  

The daily death toll (202) was above 200 for the first time in six days, bringing the total from 5,913 to 6,115.

Merkel has previously explained how even a small increase in the rate could leave Germany’s hospitals overburdened by coronavirus cases.