QII-2020 QUARTERLY REPORT GERMANY
Strong signals in tough times Economic stimulus package to ward off deep recession
▪
The federal government’s economic stimulus package sends a strong signal to its citizens and businesses. The package will stabilise economic output before the end of the year.
▪
Economic output is set to drop by 6.5 percent in real terms. A full recovery cannot be expected until well into 2022.
▪
The coronavirus crisis is hitting the economy with full force. German exports are set to shrink by around 15 percent this year and imports by around twelve percent. The BDI expects investment in plant and equipment to tumble 20 percent. We expect private consumption to shrink by around seven percent.
▪
Additional support measures must stay on the political agenda. The right incentives to kick-start consumption and investment are in place, but there is not enough scope for offsetting losses. The legislator must adopt further measures in the course of the year to secure liquidity and reduce the risk of insolvencies.
▪
Ten-year growth package and corporate tax reform required. To effectively counter the period of weak global economic demand, investment activity and foreign trade that will last for several years to come, Germany needs to adopt a ten-year investment package with a volume of around one to 1.5 percent of its annual economic output. Structural reform and a lower corporate tax rate of 25 percent are further necessary steps.
Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Content The German economy ......................................................................................................................... 3 Covid-19 pandemic drastically decreases economic output ................................................................. 3 Labour market impacted by Covid-19 pandemic................................................................................... 6 Incoming orders in industry: tangible impact of Covid-19 pandemic .................................................... 7 Industrial production nosediving since mid-March ................................................................................ 9 Capacity utilisation at record low in many industries .......................................................................... 10 Severe drop in sales for manufacturing .............................................................................................. 10 The federal government’s economic stimulus package ............................................................... 12 Economic stimulus package on the right track .................................................................................... 12 Support package for businesses, but offsetting of losses insufficient ................................................. 13 Social guarantee a good step ............................................................................................................. 13 Incentivising investment with the stimulus package ............................................................................ 13 Economic policy measures support economy ..................................................................................... 14 Outlook ............................................................................................................................................... 15 Imprint ................................................................................................................................................ 17 Basic data for national accounts ..................................................................................................... 18
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
The German economy Covid-19 pandemic drastically decreases economic output The German economy has been infected by the coronavirus. While the first two months of the current year were barely affected, economic output plunged once the contact restrictions and lockdown measures were put in place in the middle of March. In the first quarter 2020 overall, gross domestic product (GDP) dropped by 2.2 percent in real terms after seasonal and calendar adjustment compared to the fourth quarter 2019. This was the steepest drop recorded since the global financial and economic crisis when GDP dropped by 4.7 percent in the first quarter 2009 compared to the previous quarter. Since economic output already dropped by 0.1 percent in the fourth quarter of last year, the German economy is now in recession for the first time since the turn of the year 2012/2013.
Growth in real GDP in percent 4 3
2.5
2.2 2
1.5
1
0.6
0 -1 -2 -3 I
II
III
IV
I
2016
II
III
2017
change over previous year quarter
IV
I
II
III
2018
IV
I
II
III
2019
change over previous quarter
IV
I
II
III
IV
2020 change over previous year
Source: Federal Statistical Office
First quarter economic output was also down substantially in the year-on-year comparison. Real GDP dropped by 2.3 percent compared to the first quarter 2019 following calendar adjustment. Steeper drops in quarterly output year on year were only seen in 2009, with the first quarter recording the steepest drop of 6.9 percent. As the coronavirus containment measures only came into force towards the end of the first quarter and have to some extent remained in place until May, we expect an even sharper drop in output in the second quarter 2020. Compared to the rest of Europe, the economic slump at the beginning of the year in Germany was just half as pronounced as in the countries worst hit by the corona crisis, namely France, Italy, and Spain. In the first quarter, the economic output was generated by a workforce of around 45 million. That is 147,000 more people or 0.3 percent more than one year ago. Individual economic sectors were differently affected by the contact and lockdown restrictions introduced to contain the coronavirus.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Gross value added in manufacturing suffered the strongest drop, plunging 6.4 percent. This sector was affected not just by the safety precautions themselves but also by disruptions to its supply chains. The decrease in manufacturing output also affected some service sectors. The value added of corporate service providers, for example, declined by 1.2 percent and that of other service providers by 2.8 percent. Activities in the retail, transport and hospitality sectors dropped by three percent. Some sectors, meanwhile, actually managed to increase their price-adjusted gross value added compared to the previous year, with a rise of 1.5 percent recorded in the information and communication sector, 1.4 percent among financial and insurance service providers, and 0.6 percent among public service providers. Overall, gross value added decreased by 1.8 percent in the first quarter 2020. On the expenditure side of GDP, private consumption was a major factor curbing economic growth. Consumption expenditure of private households dropped 2.2 percent year on year in the first quarter 2020 following price adjustment. Consumers primarily cut down their spending on hotels and restaurants (down 12.1 percent) and on clothing and shoes (down 11.9 percent). Spending on transport and communication services as well as on leisure, entertainment and culture sank more than average, falling four and 4.5 percent respectively. While spending on housing, furniture and household goods remained steady, people spent substantially more on food, beverages and tobacco (up 4.4 percent). State consumption expenditure bucked the general negative trend, going up by 2.2 percent, meaning that, in total, consumption expenditure only shaved 0.7 percentage points off economic growth. Gross fixed capital formation dropped for the first time in five years, slipping down 0.2 percent. Construction investment is still going strong, recording a balanced and robust increase of 4.8 percent across all sectors. Investment in other assets (patents and licences) also increased, going up by 2.7 percent. Investment in plant and equipment, on the other hand, registered its strongest decrease in seven years, tumbling 9.2 percent, and turning the overall trend in investment slightly negative. Exports of goods and services dropped by 3.2 percent in the first quarter, with exported goods and exported services contracting in similar measure. The decline in imports was less severe at minus 1.7 percent. The volume of imported goods only dropped by 1.1 percent whilst imported services went down by 3.8 percent. All in all, foreign trade brought GDP growth down by 0.9 percentage points. Foreign trade by country In the first quarter 2020, exports of goods and services dropped by a total of 10.9 billion euros or 3.2 percent compared to the same period last year according to preliminary figures (country-specific seasonally adjusted data not available). Trade with the United Kingdom suffered the most substantial drop by far. Exports to the country slumped 3.27 billion euros or 14.3 percent. Exports to China also dropped substantially, going down by nearly two billion euros or 8.3 percent. Exports to Germany’s five main euro trading partners, France, the Netherlands, Italy, Austria and Spain, decreased by almost seven billion euros or 7.1 percent. While exports to Japan also contracted considerably, going down by 10.2 percent or 557 million, exports to the United States only dropped by a moderate 1.2 percent or 352 million. Exceptions to the general trend with an increase of somewhat more than one billion euros were exports to South Korea (up 26.4 percent) and to Poland (up 6.6 percent). Although exports to Turkey increased by 821 million euros or 18.1 percent, and exports to Saudi Arabia increased by 481 million euros or 39.3 percent, this was in both cases a technical reaction to the steep decreases registered last year.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
German exports and imports in Q1 2020 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros South Korea
increase (+) or decrease (-) in imports
in %
5 206.0
+ 1 088.5
+
26.4
Poland
17 052.6
+ 1 055.1
+
Switzerland
14 837.0
+
857.0
Turkey
5 345.0
+
Saudi Arabia
1 703.3
Taiwan
2 190.9
USA
in million euros
in %
USA
18 648.3
+
940.4
+
5.3
6.6
Switzerland
12 533.7
+
800.0
+
6.8
+
6.1
Ireland
5 029.5
+
651.7
+ 14.9
821.1
+
18.1
10 407.4
+
557.8
+
5.7
+
480.7
+
39.3
+
241.9
+
12.4
Slovakia
3 747.7
-
360.9
-
8.8
Brazil
1 585.1
-
393.6
-
19.9
Spain
8 226.7
-
416.5
-
4.8
Great Britain
28 789.3
-
352.2
-
1.2
BVI 1)
0.3
-
427.9
-
99.9
Austria
10 525.7
-
572.7
-
5.2
Japan
4 880.4
-
556.6
-
10.2
Norway
2 622.9
-
682.0
-
20.6
Spain
10 676.6
-
946.9
-
8.1
Finland
1 998.5
-
697.6
-
25.9
Austria
15 956.1
-
975.8
-
5.8
France
16 162.2
-
740.5
-
4.4
Italy
16 483.5
- 1 319.8
-
7.4
Czech Republic
11 188.1
-
965.2
-
7.9
Netherlands
22 353.6
- 1 452.0
-
6.1
Netherlands
24 526.9
- 1 172.0
-
4.6
China
21 544.0
- 1 952.2
-
8.3
Belgium
10 306.2
- 1 487.5
-
12.6
France
25 594.8
- 2 300.0
-
8.2
China
25 789.2
- 1 509.0
-
5.5
Great Britain
19 545.1
- 3 269.2
-
14.3
Russia
6 873.8
- 2 113.7
-
23.5
325 030.1
- 10 907.0
-
3.2
273 196.7
- 8 130.9
-
2.9
Total 1)
Total
British Virgin Islands
Sources: Federal Statistical Office, own calculations
In the first quarter 2020, German imports dropped by 8.13 billion euros or 2.9 percent compared to the same period the previous year. The steepest drop in absolute terms was in imports from Russia (down 2.11 billion euros or 23.5 percent). The main factor playing into the equation here, as with imports from Norway (down 20.6 percent), was the downward trend in prices for fossil fuels. Imports from China also decreased substantially, going down by 1.51 billion or 5.5 percent. Germany’s western neighbours, the Netherlands, Belgium and France, ordered six percent less goods and services. Imports from the United States bucked the negative trend and rose by 940 million euros or 5.3 percent, buoyed by the unusually high number of imported passenger cars, primarily with electric drive. Imports also increased from Ireland (up 652 million euros or 14.9 percent) and from the United Kingdom (up
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
558 million euros or 5.7 percent). The demand for pharmaceutical products and gold for non-monetary purposes were the factors driving up imports from Switzerland (up 800 million euros or 6.6 percent). Labour market impacted by Covid-19 pandemic It is already evident that the coronavirus crisis and the lockdowns imposed to contain it will have a greater impact on the labour market than the financial and economic crisis of 2008 and 2009. A huge number of businesses have applied for short-time work. According to figures from the Federal Employment Agency, businesses registered 2.64 million employees for short-time work in March and 8.02 million in April. An additional 1.06 million employees were registered for short-time work between 1 and 27 May. The final figures will be lower as not all registrations result in short-time work in the end. Nonetheless, the final figures for March already show a rise in short-time work. According to preliminary projected figures from the Federal Employment Agency, 2.02 million employees received a short-time work allowance in March. The number of employees on short-time work in February was 132,000. The level will thus be well above that of 2009. In the whole of 2009, the Federal Employment Agency received claims for 3.3 million employees. The Federal Employment Agency is expecting the annual average number of short-time workers to reach 2.2 million. In contrast to the financial and economic crisis, this time around it is not just the manufacturing sector but industries across the service sector that have been affected. Employees from the retail sector, food service and vehicle production accounted for around one fifth of those registered for short-time work in March and April. In the hotel and restaurant, tour operator and aviation sectors, short-time work was announced for more than three quarters of all employees subject to social security contributions. Given these figures, the governing coalition is absolutely right to have decided in its economic package to review the current regulations on the short-time work allowance in September and to present a reliable regulation designed to come into effect as of 1 January 2021. By this time, it will also be easier to foresee the medium-term consequences of the pandemic for the labour market. Employment and unemployment figures are also showing significant signs of a slowdown. In April, Germany’s workforce (based on place of work) totalled 44.90 million according to the Federal Statistical Office, which is 218,000 below last year’s figure. After seasonal adjustment, the number of employed persons dropped by 275,000 in April compared to March. Figures for employment subject to social security contributions are at present only available for March so do not yet reflect the full impact of the lockdown. According to preliminary projected figures from the Federal Employment Agency, the number of employees subject to social security contributions increased by 330,000 to 33.62 million in March compared to the same month last year. After seasonal adjustment, however, the figures show a drop of 21,000 from February to March, following a slight increase of 10,000 from January to February. The unemployment figures and demand for labour already clearly reflect the consequences of the Covid-19 crisis. Only 76,000 vacancies were reported in April and 102,000 in May. Taken together, this corresponds to 176,000 or 50 percent less than in the same period the previous year. The number of registered unemployed individuals increased in May by 169,000 over April’s figure, reaching a total of 2.81 million, and even 238,000 after seasonal adjustment. This corresponds to an increase of 577,000 over the previous year. The rate of unemployment increased from 5.8 to 6.1 percent. The Federal Employment Agency estimates that a total of 578,000 individuals will be affected by unemployment and underemployment due to the coronavirus crisis by May. This is due not only to new
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
unemployment but also because less unemployed people are finding a new job or are participating in government employment measures on account of the lockdown. German labour market* 34
4 Unemployed persons (right axis)
33
3 32 31
2 Employed persons covered by social security (left axis)
30
1 29 2
28 2012
2013
2014
2015
2016
2017
2018
2019
0
2020
Difference in the number of workers making social security contributions from the same month last year (right axis)
*seasonally adjusted in million Source: Federal Employment Agency
Incoming orders in industry: tangible impact of Covid-19 pandemic The latest figures on incoming orders also clearly reflect the impact of the coronavirus pandemic. Orders in manufacturing dropped by 25.8 percent in April compared to the previous month, following a drop of 15 percent in March, both after seasonal and calendar adjustment. This is the biggest drop seen since this figure began to be recorded in January 1991. The largest decrease until now was the 7.5 percent drop registered in January 2009. Compared to April last year, incoming orders were down 36.6 percent which is an even greater tumble than during the global financial crisis ten years ago. The steepest drop in incoming orders recorded then was 36.4 percent. Incoming orders in the first quarter 2020 overall were 2.5 percent lower than in the previous quarter, with both domestic and foreign demand decreasing in equal measure. Year on year, demand fell by 5.2 percent, curbed particularly by weak domestic demand (down 7.7 percent). Foreign demand was only 3.3 percent lower year on year. Among the main groups of industrial goods, producers of intermediate goods ran counter to the general negative trend in the first quarter 2020, recording an increase in orders of 2.6 percent. Year on year, the increase was a marginal 0.1 percent. Domestic demand dropped 2.3 percent compared to the previous year, while orders from abroad increased 2.4 percent. Demand for capital goods veritably slumped in the first quarter 2020, plunging 6.1 percent compared to the previous quarter and 9.3 percent year on year. The drop in domestic orders of 13.2 percent year on year was considerably more pronounced than in foreign orders (down 6.9 percent).
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
New orders, manufacturing 115
10
110
5
105
0
100
-5
-2.5 -0.2 -1.0
95
-10
90
-15
85
-20
80
-25
75
-33.9
70
-30 -35
2016
2017
2018
2019
2020
Change over previous year, two-month-average, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office
Consumption goods producers received 0.7 percent more orders in the first quarter 2020 than in the previous quarter. The fourth quarter 2020 had also seen an increase in orders. Year on year, first quarter orders were up by 2.3 percent compared to the first quarter last year. While domestic orders only exceeded last year’s figure by a slim 0.2 percent, orders from abroad increased 3.8 percent. In the first two months of the year, incoming orders seemed to be recovering slightly, signalling an end to the weak level of incoming orders seen since the turn of the year 2018/2019. This trend was particularly pronounced among producers of consumer goods and intermediate goods. Capital goods producers recorded less orders in the same period but had a higher backlog of orders. According to figures from the ifo Institute, this backlog dropped slightly at the beginning of the second quarter but, at 3.6 production months, was still over the ten-year average. The producers of intermediates face a different situation, with their backlog dwindling for the third quarter in a row. Currently, these companies have a backlog worth 2.4 production months, which is below the ten-year average. The backlog among consumer goods producers is 1.9 production months, which is also below the ten-year average. The Federal Statistical Office began collecting figures again on incoming orders for manufacturing in 2015. This statistics had previously been dropped as part of efforts to reduce bureaucracy but was then reintroduced in the wake of the financial crisis to keep tabs on the phenomenon of cancelled orders. The latest available preliminary figures from the Federal Statistical Office are from March and show a reduction in incoming orders of 0.9 percent compared to February following seasonal and calendar adjustment. The backlog of domestic orders contracted by 1.3 percent while the backlog of foreign orders slipped 0.6 percent. This shows that, in March at least, industrial enterprises did not experience an unusually high rate of cancellations due to the coronavirus pandemic.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Industrial production nosediving since mid-March Output in the production sector in April 2020 was down by 17.9 percent on the previous month after price, calendar, and seasonal adjustment, according to preliminary data from the Federal Statistical Office, following a fall of 8.6 percent already in March. The latest figures show a drop in energy production of 7.2 percent. Activity in the construction sector increased by a slight 0.9 percent. In industry, production fell 22 percent in April, which is the largest drop ever registered since records started in 1991. Among the main industrial groups, the production of consumption goods registered the smallest drop with minus 8.7 percent. The output of intermediate goods decreased 13.8 percent. The production of capital goods veritably collapsed, plunging 35.3 percent. Production, manufacturing 10 108 5 103
0
98
-5
-2.3
-10
93
-15
-12.9 88
-20 -20.1
83
-25 -27.9
78 2016
2017
2018
2019
-30
2020
Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Satistical Office
Following a slight revision to the March figures, industrial production sank by 2.3 percent in the first quarter 2020 compared to the fourth quarter 2019 following seasonal and calendar adjustment, after decreasing 1.7 percent the previous quarter. This is the seventh consecutive quarter that production level has been in decline. Production has also been falling for seven quarters year on year. The pace of decline has accelerated, with output falling most recently by seven percent. Among the main industrial groups, producers of intermediates actually recorded an increase in production over the previous quarter (up 0.9 percent) after seasonal and calendar adjustment for the first time in six quarters, but still produced much less than one year previously (down 3.5 percent). Capital goods producers produced five percent less than in the previous quarter and 10.8 percent less year on year. The production of consumption goods dropped by two percent compared to the previous quarter and by 3.8 percent compared to the same period last year. After nudging towards recovery in the first two months of the year, industrial production, already weakened by the ongoing recession since the middle of last year, caught the coronavirus towards the end of the first quarter. In terms of duration, German industry is now already experiencing its longest recession since reunification. April is expected to be the bottom of the trough of the economic cycle as the restrictions on social and economic activities were greatest at that time. The gradual easing of protective measures and resumption of production in the automotive industry should see industrial activity picking up pace
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
slightly in May. Nonetheless, another substantial decline in production in the manufacturing sector is to be expected in the second quarter. Production development in the manufacturing industry year on year change in percent 2018 2019 2019 2020 Year Q3 Q4 Q1 original value calendar adjusted
compared to previous period in percent 2019 2020 Q3 Q4 Q1 Feb Mar Apr seasonally and calendar adjusted
Production
0.9
-3.3
-3.7
-4.0
-5.2
-0.8
-1.1
-1.1
0.3
-8.9
-17.9
Industry
1.1
-4.2
-4.3
-5.0
-7.0
-0.8
-1.7
-2.3
0.4
-11.0
-22.0
Intermediate goods
0.6
-3.6
-4.4
-4.6
-3.5
-1.2
-0.8
0.9
1.8
-7.2
-13.8
Capital goods
0.9
-4.5
-2.9
-6.7
-10.8
-0.4
-3.2
-5.0
-1.2
-15.6
-35.3
Consumer goods
2.9
-4.7
-7.7
-1.3
-3.8
-1.0
0.3
-2.0
1.8
-7.3
-8.7
Energy
-1.5
-7.2
-13.0
-5.6
-8.7
-3.2
3.1
-2.7
0.9
-6.3
-7.2
Construction industry
0.2
3.3
2.6
1.8
7.3
0.0
0.1
5.3
-0.3
1.0
-4.1
Construction industry proper
7.7
5.9
4.5
5.1
9.0
0.4
0.8
4.6
-1.3
-2.0
-0.2
Finishing industry
-5.5
1.0
0.9
-0.6
5.7
-0.3
-0.5
5.9
0.5
3.9
-7.7
Sources: Federal Statistical Office, own calculations
Capacity utilisation at record low in many industries The slump in production has been accompanied by a drop in capacity utilisation. In manufacturing, capacity utilisation fell by 12.5 percentage points in the second quarter 2020, down to 70.6 percent. Capacity utilisation has only ever been lower than this in the second and third quarter of 2009 when it registered 70.3 and 70.4 percent respectively. In manufacturing, excluding food, beverages and tobacco, capacity utilisation was down to 70 percent, only marginally above the all-time low of 69.6 percent recorded in 2009. Among the individual industries, vehicle production has suffered the most. Capacity utilisation really took a plunge here, descending to a new record low of 44.9 percent. The lowest this figure had ever previously been was 62.9 percent during the global financial crisis. Producers of textiles (64.5 percent) and furniture (70 percent) also registered record low utilisation rates. The pharmaceutical industry, on the other hand, is going at full steam, with capacity utilisation rising to a new all-time high of 91 percent. Severe drop in sales for manufacturing The first direct effects of the coronavirus crisis are also reflected in the sales figures of industrial enterprises for the first quarter 2020. Manufacturing sales between January and March were four percent lower compared to the same period last year. Foreign sales, at minus 5.2 percent, were down almost twice as much as domestic sales (down 2.7 percent). Companies were already suffering from
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
negative growth rates at the beginning of the year, but the downward trend really accelerated with the lockdown from the second half of March, bringing the figures for the month down 7.6 percent compared to last year. Foreign sales dropped by 10.4 percent and domestic sales by 4.6 percent. Most of the major industries recorded substantial falls in sales. The clothing industry was particularly hard hit, with a 28.4 percent drop in sales in March. The automotive industry saw sales decrease on a similar scale (down 23 percent). The downward trend in machinery manufacturing and the metal and electrical and electronics industry also intensified. The food industry and the chemical and pharmaceutical industry, on the other hand, recorded moderate growth. Sales in the chemical industry increased by 2.6 percent in March 2020, and, in pharmaceuticals, by 1.4 percent. These gains failed to compensate for the weak performance in previous months, bringing the quarterly result to minus 0.6 percent and minus 5.2 percent respectively, and thus continuing and intensifying the negative trend recorded in the last few quarters. ifo business climate plunges but slight recovery in May The ifo business sentiment index for Germany brightened slightly in May after plummeting to an alltime low in April. While the assessment of current business deteriorated further, business prospects for the next six months have become more optimistic. Business prospects recorded the biggest
ifo Business-Cycle Clock German manufacturing*
30
Jan 2011
Upswing
Business expectations for the next six month
20
Boom
Jan 2014
Jan 2010
10
Jan 2018
Jan 2017
0
Jan 2020
-10
Jan 2016 Jan 2015 Jan 2012 Jan Jan 2019 2013
-20 May 2020
-30 -40
Jan 2009
-50 Downswing
Recession -60 -60
-50
-40
* Balances seasonally adjusted
-30
-20
-10
0
10
20
30
40
50
60
Assesment of current business situation
Source: ifo Institut
increase ever, surging up 10.7 index points. Among the individual sectors, sentiment among service providers has brightened considerably following a record low in April, primarily on account of better business prospects. Current business was also rated as slightly improved in this sector. Confidence
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
has also returned to the retail and wholesale sector, with both current business and prospects recovering tangibly. Sentiment improved in retail, in particular, in response to the easing of restrictions. In mainstream construction, the business sentiment index pointed up again for the first time in over six months. Construction companies are much more optimistic about their business prospects for the next six months although the assessment of current business again deteriorated slightly. Sentiment in manufacturing – unlike in trade and industry as a whole – did not sink to a record low in April and the robust upward move of 3.8 index points in May was not a record increase either. Individual industrial companies rated their current business situation as considerably worse again than in April. However, business prospects in the sector have improved visibly. Prospects for industrial exports have also leapt up, with only half as many companies taking a pessimistic view.
The federal government’s economic stimulus package In view of this dramatic situation, the economic stimulus package adopted by the governing coalition is coming at the right time. It sends a strong signal to Germany’s citizens and businesses to boost their consumption and investment expenditures already this year. The 130 billion euro package covers the years from 2020 to 2022 but also includes longer-term measures to stimulate growth. In the short time available, the volume of the stimulus package has not yet been adequately planned but it does include many positive components to fuel investment. Economic stimulus package on the right track Most of the measures agreed by the governing coalition will start to take effect before the end of the year. The package primarily aims to mitigate the impending recession by boosting private consumption. A key component is the temporary reduction in value-added tax from 19 to 16 percent, and from seven to five percent in hospitality, to take effect from 1 July 2020 for six months until the end of 2020. While this measure is expected to cut tax revenues by around 20 billion euros, it will substantially increase the purchasing power of private households. The temporary reduction in value-added tax will also incentivise households to buy durables such as vehicles, furniture, and other more expensive items. This is certainly a step in the right direction to counter the extreme reticence households have shown in making purchases in the last few weeks, which has led to a steep drop in demand in these segments. These measures are designed to help demand return to a normal level more quickly and could also bolster corporate profit margins in some industries. Furthermore, the package boosts private purchasing power with a one-off bonus for families of 300 euros per child to be paid out in 2020. This bonus will be offset against the child tax allowance of income tax, injecting 4.3 billion euros into low and medium-income households. Single-parent families will further benefit from additional tax relief, increasing their total disposable income by 750 million euros overall. These measures will not only directly fuel private consumption but will also encourage people to return to normal levels of consumption following the reticent buying behaviour triggered not only by the restricted access to goods but also by worries about the future. These patterns can easily turn into a vicious circle of plummeting sales, business closures and reduced income. And this is precisely what the government’s economic policy measures need to prevent. The easing of restrictions in many areas should also bring consumption back to normal in areas such as gastronomy, tourism and over-the-counter retail. This alone should improve economic output by a good 0.7 percent. The government has furthermore announced that it will present a reliable regulation on short-time work allowance in September to take
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
effect as of 1 January 2021. Short-time compensation may therefore well contribute to stabilising incomes next year as well. Support package for businesses, but offsetting of losses insufficient The federal government is also planning a further stimulus package for businesses, with additional 25 billion euros to be made available this year in bridging aids for companies that suffered very high sales losses. This package will be aimed chiefly at helping the self-employed and small companies, and should ward off some insolvencies and prevent the spending of companies and their employees from caving in. As it is not yet clear how the package will be financed it is unlikely to inject additional economic impetus by itself but should prevent more incomes from falling away. The government has also provided an additional liquidity buffer of five billion euros by postponing the due date for import sales tax. It has nonetheless fallen short of the mark in some points concerning measures for companies. The increase in the maximum amount for tax loss carrybacks for 2020/21 is far too low. Companies should be given more extensive loss carryback options to stabilise them across the period in which they are experiencing a drastically reduced capacity to operate. The maximum loss carryback has only been increased for one year and the maximum ceiling of five million euros will be far too low to adequately help many of the companies threatened by insolvency to bridge the gap in sales caused by the coronavirus crisis. Social guarantee a good step The “Social Guarantee 2021� agreed by the governing coalition is important for the business sector and citizens alike. The guarantee will ensure that the percentage of social security contributions will not exceed 40 percent until 2021. An increase in the social security contribution rates would raise the non-wage labour costs for businesses and reduce the net income of employees, which would be completely wrong in the current economic context. Compensating the reduced revenue and additional costs of social security institutions with higher federal subsidies is thus the right thing to do. A good five billion euros has been earmarked for this purpose. The government will also use eleven billion euros from its federal budget funds over the next two years to finance the originally intended increase in the renewable energy surcharge, the EEG levy. This will avoid placing an additional burden on businesses. Additional economic stabilisation programmes are also in the pipeline for sectors that have been hit particularly hard by the crisis, including non-profit organisations, art and culture, and forestry. Incentivising investment with the stimulus package The package also includes a number of measures to stimulate investment. In the short term, degressive depreciation will be temporarily allowed for movable fixed assets (at a factor of 2.5 and maximally 25 percent) this year and the next. Companies are expected to pull forward purchases on account of this measure to the tune of around six billion euros. The coalition government failed to agree on special depreciation rules for specific areas of investment. This would have been a good step to take. The government also plans to bring forward public investments that have already been approved and ensure that they are paid out by the end of next year (volume: ten billion euros). It will also step up the financing of investment in the education sector (3.5 billion euros) and has increased the funding allotted to its energy-efficient building refurbishment programme by one billion euros in both 2020 and 2021. Although this will still not be enough to meet the climate targets the government has set itself in this sector, it is nonetheless a step in the right direction.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
The federal government’s economic stimulus package also includes a raft of additional support measures that cannot be discussed individually here. The total volume of the additional measures is 50 billion euros. The mobility support measures have a volume of around 14 billion euros and climate protection measures ten billion euros. Further areas of funding are digitalisation (15 billion euros) and healthcare (almost ten billion euros). Other positive steps are the doubling of the corporate tax allowance for research (one billion euros), increased co-financing of research projects of non-university institutes with companies and project-related research (together 1.3 billion euros) and the increase of the budget for the Joint Task of Improving Regional Economic Structure (GRW) by 500 million euros. The federal government has also decided to shoulder some of the costs of municipalities in order to mitigate the procyclical cuts in investment and consumption spending that would otherwise occur. The federal government will pay up to 75 percent (increase of 25 percentage points) of the costs for accommodation and heating in the basic social security of individuals seeking employment (four billion euros). The federal and state governments will also balance out the shortfalls in trade tax revenue (almost six billion euros) and the federal government will provide 2.5 billion euros in grants to the states to compensate for reduced revenues from public transport services. This raft of measures is primarily designed to protect the necessary municipal investments that have been far too low in the last few years. Economic policy measures support economy The decisions made by the coalition have not yet been presented in sufficient detail to fully and accurately forecast the economic impact the measures will have. This will only be possible once the supplementary budget has been presented along with a more detailed timeline of the individual measures from 2020 to 2022. Already clear is that the package will increase GDP between one and one-and-a-half percent this year. While measures to stimulate consumption have a relatively shortterm impact, the effects of measures to stimulate investment and structural policy measures tend to be more protracted. It is therefore not possible to say precisely when these measures will unfold their impact on the economy. But as the economy will, in any case, take the next two years to fully recover this is not, in fact, of decisive importance. Measures decided now that will only have an effect in 2021 still make sense. The main thing is to ensure that the recovery does not take too long to set in and thus prevent avoidable insolvencies that would permanently weaken production and employment. This danger has been mitigated by the stimulus package but cannot yet be ruled out completely. This should not be interpreted as a reproach but is simply unavoidable given the high level of uncertainty about when economic activity will return to normal, and the further course of the pandemic. It is therefore clear that in the next few months, the government will have to regularly review whether the measures taken so far are adequate. A high number of insolvencies is a particular threat. However, it is also not possible to reliably anticipate the number of insolvencies in advance as the combination of liquidity reserves of companies, support loans, normal equity and external capital measures in bank lending and on the capital markets, and the return to business as usual are all factors that cannot be forecast with any precision. The European Commission, for example, estimated the need for fresh equity to make up for the losses caused by the coronavirus in Europe at between 720 and 1,200 billion euros, which is certainly a plausible figure.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Outlook When the Covid-19 crisis broke out in China, the primary issue here in Germany was how to deal with the ensuing production and transport disruptions given our supply chain links with this country. The coronavirus has since spread swiftly through Europe, North America, and the whole world. Other problems are now more pressing. While the Chinese economy is picking up pace again, Europe is tackling the question of how to structure its relaunch. As a matter fact global trade will continue to be massively disrupted for a prolonged period of time and a double-digit slump in volume is unavoidable for this year. The global recession will further dampen investment activity and, with it, global industrial production. The latest forecasts for the global economic recession this year put the scale of contraction at between five and over seven percent. Europe will probably be at the bottom end of that range which will further weigh on Germany due to its close trade connections with European countries. The consequences of the global economic slump for Germany are set to be huge. Just over one half of Germany’s economic output depends on foreign trade and as economic growth is tumbling among almost all its trade partners, the demand for goods “Made in Germany� is bound to fall steeply. We expect exports of goods and services to decrease by 15 percent in real terms this year. As this will also result in a lower demand for intermediates, and domestic demand is set to remain low, imports will also be turning down sharply, by about twelve percent. Overall, net exports are likely to pull down growth in GDP by 2.2 percentage points. These figures are dramatic enough, but they are actually based on a tangible recovery taking place in the second half of the year. Exports could well even fall by as much as 20 percent or more. The federal government and the European Commission have forecast a good ten-percent drop in exports, but these figures have been published earlier. The weak foreign trade environment is spreading to large sections of the domestic economy. It is therefore not just the workforce of economic sectors directly affected by the lockdown and contact restrictions that are facing prospects of reduced income or even unemployment, but also employees in export-focused industries. The next few months will show how great the consequences of the coronavirus crisis are for the labour market as underemployment is currently being absorbed by the short-time work regulation. The latest figures nonetheless show that unemployment is rising, making fears of job losses or reduced incomes a very real obstacle to consumption. This trend is also reflected in the consumer climate measured by market research company GfK. Although this index recovered from the Covid-19 pandemic shock slightly in May, it is still only just hovering above the extremely low sentiment recorded in the last two months. The demand for everyday goods is unlikely to drop significantly, but we expect consumers to display great reticence in the acquisition of durable consumer goods. The increase in statutory pension payments scheduled for July of more than three percent should improve the situation slightly. Overall, without any stimulus to counter the negative trend, real private consumption expenditure would probably have plummeted by between 8.5 and ten percent this year. According to rough estimates, real private consumption expenditure dropped by around 15 percent in the second half of March. Data for April and May is not yet available but is highly unlikely to reflect a visible recovery. The support measures adopted by the government will only partially compensate for the reduction in private consumption but should keep the year-on-year decrease down to seven percent. This forecast is based on the assumption that the spending of private households will gather considerable momentum. We also expect state consumption expenditure to increase by around four percent. This would result in an overall drop in consumption expenditure of 4.1 percent.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
BDI forecast for 2020: Change in real economic output over the previous year in percent Actual figures
BDI 2020
2019
Federal Government 2020
European Commission 2020
GDP, real
0.6
-6 ½
-6.3
-6.5
Consumption
1.8
-4.1
-
-
- Private consumption
1.6
-7.0
-7.4
-8.3
- Public consumption
2.6
4.0
3.7
2.8
2.6
-6.4
-5.0
-5.8
- Machinery and Equipment
0.6
-20.0
-15.1
-17.0
- Construction
3.9
0.0
-1.0
-
- Other
2.7
1.0
2.0
-
Exports
0.9
-15.0
-11.0
-12.1
Imports
1.9
-12.0
-8.2
-9.2
Net exports, Economic output
-0.4
-2.2
-2.1
-1.9
Investment
Sources: Federal Statistical Office, Federal Government (May 2020) European Commission (May 2020), own calculations
The toxic mix of disruptions on the supply side, plummeting global demand, and record low production capacity utilisation is likely to bring corporate investment activity to a standstill. The fact that interest rates remain low will do little to remedy this situation. We are expecting investment in plant and equipment to fall by as much as 20 percent, which is more than it did during the peak of the financial crisis in 2009. Construction investment is trending somewhat differently. The construction companies are currently still benefiting from a large backlog of orders. On account of the low interest rates, demand for residential accommodation will remain stable for some time to come. In commercial construction, industrial enterprises now play a less dominant role than in the past, so this sector is more exposed to the weak global economic trend. The federal government also wants Deutsche Bahn AG to keep up its investments in the railway network. In public construction, investments are expected to be stable with additional support measures likely in this sector to further stimulate the economy. All in all, we do not expect construction investment to decrease. Investment in other assets (software, research and development) is usually less cyclical but we do not expect to see the strong growth registered in the past few years but rather a moderate one percent. Overall, this would result in a decrease in gross fixed capital formation of 6.4 percent compared to the previous year. Germany’s gross domestic product is likely to drop by 6.5 percent in real terms in 2020. That would be the highest drop in the history of the Federal Republic of Germany.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Authors Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eu Thomas Hüne T: +49 30 2028-1592 t.huene@bdi.eu Solveigh Jäger T: +49 30 2028-1533 s.jaeger@bdi.eu Petra Küntzel T: +49 30 2028-1454 p.kuentzel@bdi.eu Editorial/Graphics Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu
This Quarterly Report Germany is a translation based on „Quartalsbericht Deutschland II / 2020“ as of 9 June 2020.
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Strong signals in tough times | Economic stimulus package to ward off deep recession 18/06/2020
Basic data for national accounts GDP (price, seasonally and calendar adjusted) Change over previous period in percent 2019
2020
2018
2019
Q1
Q2
Q3
Q4
Q1
1.3
1.8
1.0
0.2
0.5
0.0
-2.2
-Private consumption
1.3
1.6
0.9
0.2
0.2
0.0
-3.2
-Public consumption
1.4
2.6
1.1
0.5
1.4
0.1
0.2
3.5
2.6
1.6
-0.3
-0.1
-0.4
-0.2
-Machinery and Equipment
4.4
0.6
1.1
0.0
-1.4
-2.0
-6.9
-Construction
2.5
3.9
2.6
-0.9
0.4
0.1
4.1
-Other
4.3
2.7
-0.6
0.9
1.0
1.1
-0.3
Domestic demand
2.1
1.0
0.3
0.3
-0.5
0.3
-1.5
Exports
2.1
0.9
1.7
-1.4
1.3
-0.6
-3.1
Imports
3.6
1.9
1.4
-0.3
-0.3
0.1
-1.6
Total
1.5
0.6
0.5
-0.2
0.3
-0.1
-2.2
Consumption
Investment
Contribution to growth (in percentage points) Consumption
1.0
1.3
0.7
0.2
0.4
0.0
-1.6
-Private consumption
0.7
0.8
0.5
0.1
0.1
0.0
-1.7
-Public consumption
0.3
0.5
0.2
0.1
0.3
0.0
0.0
0.7
0.6
0.3
-0.1
0.0
-0.1
0.0
-Machinery and Equipment
0.3
0.0
0.1
0.0
-0.1
-0.1
-0.5
-Construction
0.3
0.4
0.3
-0.1
0.0
0.0
0.4
-Other
0.2
0.1
0.0
0.0
0.0
0.0
0.0
Change in stocks
0.3
-0.9
-0.8
0.2
-0.9
0.3
0.3
Domestic demand
2.0
0.9
0.3
0.3
-0.5
0.3
-1.4
-0.4
-0.4
0.2
-0.5
0.8
-0.4
-0.8
Investment
Net exports
Source: Destatis
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