Angela Merkel Germany (Getty)

Germany’s Economy is Not Impervious to COVID-19 Either

Despite all the praise on how Germany has handled the COVID-19 crisis, the country is not immune to the economic impact either.

Germany’s Economy Slumps

As a result of the pandemic’s effects, the German economy shrank by 2.2 percent in the first quarter of 2020, when coronavirus restrictions largely brought German business to a standstill. Germany’s gross domestic product even fell as sharply as last time in 2009.

Germany has thus plunged into a recession as a result of COVID-19 and its economic implications. According to data from the Federal Statistical Office, Germany’s gross domestic product decreased by 2.2 percent in the first quarter compared to the previous quarter of October to December, 2019.

The pandemic spread across Europe in March. Exit restrictions closed borders and businesses largely brought economic life to a standstill. Compared to the first quarter of 2019, the decrease was 1.9 percent.

German’s Second-Biggest Decline Since 1990

According to preliminary data from the Federal Office, the slump at the beginning of the year was the most significant quarterly decline since the global financial and economic crisis in 2009 and the second-largest since German reunification in 1990.

Unsurprisingly, foreign trade also collapsed due to the pandemic, with exports decreasing by 3.1 percent and imports decreasing by 1.6 percent. Since the strict containment measures due to the corona pandemic only started in mid-March, the lockdown is likely to slow the economy down further in the current second quarter than at the beginning of the year.

Accordingly, Germany’s government expects the worst recession in the post-war period in 2020 with a 6.3 percent decrease in the country’s GDP.

Investment Falls

Already companies were investing significantly less in machinery, equipment, vehicles, etc. (a 6.9 percent drop). Only an increase in construction investments (plus 4.1 percent) and government spending (plus 0.2 percent) prevented an even bigger crash.

Already in the final quarter of 2019, the economic performance had declined by 0.1 percent compared to the previous quarter, according to the latest calculation by statisticians. What does not sound like a high figure, could yet become what economist call a “technical recession”, if the economic output was to decline for more than two consecutive quarters.

The German Council of Economic Experts seeks to present an updated forecast of the development of the economy in late June or early July. The council stated that the somewhat optimistic scenario that had been presented by the end of March was based on the assumption that the lockdown in Germany would not last that long.

The minus 5.5 percent of their risk scenario was, therefore, more likely, but arguably still too optimistic. Nevertheless, the actual minus should not exceed the single-digit range, as the effects of Germany’s economic stimulus programs still had to be taken into account, the council concluded.

Unfounded Optimism

The German Council of Economic Experts assumed a five-week shutdown of the economy at the end of March as the most likely scenario – a forecast that turned out to be tremendously inaccurate and borderline naïve. For the five-week shutdown, Germany’s gross domestic product was forecast to decrease by only 2.8 percent in 2020.

In the meantime, however, Germany’s government and economic institutes are expecting a more profound economic slump as a result of COVID-19. In fact, the federal government expects GDP to decline by more than six percent this year, while The Kiel Institute for the World Economy forecasts a 7.1 percent slump.

At the beginning of June, the federal government plans to present its stimulus package. However, despite its general extremely healthy economy, Germany has thus not been impervious to the impact of the pandemic – though it might be able to cope with the fallout better than others.

While the final impact of COVID-19 is still hard to quantify, Germany’s economy will arguably be equipped for almost anything. However, it may soon become a matter of how inclined German taxpayers are to compromise for the greater good.