Quarterly Report Germany III/2020

QIII-2020 QUARTERLY REPORT GERMANY

Economic low in second quarter has bottomed out Return to pre-crisis levels only expected in 2022

▪

The economic slump in 2020 will probably be slightly milder than anticipated. We are expecting a 5.4 percent decrease in gross domestic product for the whole year following price adjustment.

▪

The Covid-19 crisis is weighing on German exports and investment.

We expect German exports to drop by 13 percent. Investment in plant and equipment is set to decrease by as much as one fifth.

▪

The German economy registered the strongest slump in the second quarter of 2020 since the beginning of quarterly accounts in 1970.

Gross domestic product dropped by 9.7 percent compared to the previous quarter following price, calendar and seasonal adjustment. In the middle of the year there were clear signs of recovery. It will take until 2022 to return to pre-crisis levels.

▪

Industry has been in recession for more than two years. The measures to curb the spread of the Covid-19 pandemic are also substantially affecting the service sector.

Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

Content German economy ................................................................................................................................ 3 Coronavirus-induced slump in second quarter has bottomed out ......................................................... 3 Foreign trade: global exports tumble across all regions ....................................................................... 4 Labour market: impact of coronavirus crisis on unemployment fades .................................................. 6 Strong rebound in incoming orders for Germany industry following coronavirus shock ....................... 7 Industrial production picking up again since May ................................................................................. 8 Capacity utilisation recovers from record low ...................................................................................... 10 Steep drop in manufacturing revenue ................................................................................................. 10 ifo business climate index increases for fourth consecutive month .................................................... 11 Outlook ............................................................................................................................................... 12 Economic slump set to be slightly milder than during financial crisis year 2009 ................................ 12 Sources .............................................................................................................................................. 15 Imprint ................................................................................................................................................ 15 Basic data for national accounts ..................................................................................................... 16

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

German economy Coronavirus-induced slump in second quarter has bottomed out In the second quarter 2020, economic growth in Germany slumped dramatically due to the Covid-19 pandemic. Real GDP dropped by 9.7 percent compared to the previous quarter following calendar and seasonal adjustment. The slump was much sharper than during the global financial market crisis, when economic activity dropped by 4.7 percent in the first quarter 2009. Year on year, the decline was also massive. Price-adjusted GDP dropped by 11.3 percent, which is more than at any time since the beginning of quarterly reporting in 1970. The steepest drop to date compared to the previous year was 7.9 percent eleven years ago.

Growth in real GDP in percent 4

2.6

2.2

1.3

2

0.6

0 -2 -4 -6 -8 -10 -12 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

In the second quarter 2020, the economic output was generated by a workforce of 44.67 million. That is 574,000 or 1.3 percent less than one year ago. Following almost 17 years of rising employment in the service sector, the number of employees here dropped by 369,000 or 1.1 percent. The largest decrease in absolute figures was in retail, transport and hospitality where the workforce decreased by 272,000 persons or 2.7 percent. Corporate service providers, which also includes the provision of personnel, employed 156,000 persons or 2.5 percent less than one year ago. Among financial and insurance service providers, the downward trend in the number of workers recorded by the sector since 2010 continued (down 10,000 or 0.9 percent). Employment increases were seen among public service providers, education and healthcare (plus 141,000 persons or 1.3 percent) and in information and

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

communication (plus 18,000 or 1.3 percent). In agriculture and forestry the number of workers decreased by 34,000 or 5.3 percent. In manufacturing the number of employees decreased for the third consecutive quarter, going down by 182,000 or 2.2 percent. Employment levels in construction have so far been unscathed by the crisis, bucking the general trend with an increase of 11,000 persons or 0.4 percent compared to one year ago.

On the expenditure side of GDP, private consumption was the major factor curbing economic growth.

In the second quarter 2020, price-adjusted consumption expenditure of private households dropped by 13 percent. Spending on hotels and restaurants more than halved (down 56.3 percent) due to contact restrictions. Consumers also spent much less year on year on leisure, entertainment and culture (down 23.2 percent), clothing and shoes (down 22.8 percent) and transport and communication services (down 22.2 percent). While spending on furniture and household goods only dropped marginally, expenditure on housing, energy and water increased by 1.7 percent. Consumers increased their spending on food, beverages and tobacco (up 2.5 percent). While state consumption expenditure increased markedly in the second quarter (up 3.8 percent) it was not nearly enough to compensate for the pronounced drop in private consumption. In total, consumption pulled down economic growth by 6.1 percentage points.

Companies also significantly reduced their investment activity. Gross fixed capital formation fell by 8.3 percent. This is the largest drop since 2009, when reductions of more than ten percent were registered in the first two quarters due to a substantial decrease in construction investment. Construction investment proved much more stable and even increased year on year by 1.4 percent. Equipment investment, on the other hand, suffered its strongest decrease ever of 27.9 percent, while investment in other assets (software, patents, licences) only dropped by a slight 1.4 percent. All in all, investment brought down GDP growth by 1.9 percent. The export of goods and services plummeted by 22.2 percent in the second quarter, with goods and services dropping in equal measure. Imports fell slightly less drastically, going down by 17.3 percent. The decrease in the volume of goods imported from abroad (13.4 percent) was much less severe than that of services (down 30.6 percent). In sum, foreign trade brought GDP growth down by 3.4 percentage points.

Foreign trade: global exports tumble across all regions In the second quarter 2020, German exports registered a steep drop of 75.5 billion euros or 23.7 percent to 242.9 billion euros year on year (country-specific seasonally adjusted data not available). A bigger drop has only been registered once, namely 25 percent in the second quarter 2009. The greatest drop by far in exports was in trade with the United States, which fell 9.1 billion euros or 31.3 percent. Other sizable drops were seen in exports to France (down 8.2 billion euros or 30.6 percent) and to the United Kingdom (down 6.3 billion euros or 35 percent). Exports to the euro countries Italy, Spain and Austria also sank by more than four billion euros in each case. Exports to the Eastern European countries Poland, the Czech Republic and Hungary all dropped by more than one fifth.

Among countries outside the EU, exports to Russia fell by one quarter and those to Mexico and South Africa by half. The reduction in exports to China was comparatively moderate, dropping only 941 million euros or four percent. The only tangible growth in exports was to the Marshall Islands and Egypt.

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

German exports and imports in Q2 2020 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in exports in %

in million euros

in %

USA

20 074.7

- 9 140.6

-

31.3

France

11 841.1

- 5 007.8

-

29.7

France

18 678.6

- 8 221.4

-

30.6

Netherlands

20 068.5

- 4 529.9

-

18.4

Great Britain

11 737.1

- 6 308.0

-

35.0

Czech Republic

8 717.7

- 3 546.1

-

28.9

Italy

12 604.3

- 4 731.7

-

27.3

Russia

3 917.4

- 3 430.8

-

46.7

7 400.1

- 4 113.6

-

35.7

Italy

11 425.0

- 3 411.6

-

23.0

Austria

12 963.8

- 4 029.7

-

23.7

Austria

8 805.5

- 2 810.6

-

24.2

Netherlands

18 692.2

- 3 858.5

-

17.1

Belgium

8 344.9

- 2 801.6

-

25.1

Poland

12 897.5

- 3 414.4

-

20.9

USA

14 896.7

- 2 289.3

-

13.3

Czech Republic

8 075.7

- 3 071.7

-

27.6

Poland

12 069.0

- 2 101.7

-

14.8

Belgium

9 192.3

- 2 616.2

-

22.2

Hungary

5 344.7

- 2 087.5

-

28.1

Hungary

4 668.0

- 2 132.9

-

31.4

Spain

7 070.6

- 1 989.1

-

22.0

Russia

5 086.8

- 1 750.2

-

25.6

Romania

2 583.7

- 1 490.0

-

36.6

Mexico

1 765.4

- 1 573.3

-

47.1

Norway

1 673.8

- 1 428.3

-

46.0

South Africa

1 031.2

- 1 305.8

-

55.9

Japan

4 677.7

- 1 376.0

-

22.7

-

-

4.0 Singapore

1 574.0

+

207.5

+ 15.2

Ireland

5 510.9

+

677.1

+ 14.0

Spain

China

Egypt Marshall Islands Total

22 702.4

940.6

1 112.1

+

190.3

+

600.9

+

584.1

+ 3 474.8

China

29 809.9

+ 4 534.4

+ 17.9

-

Total

217 578.6

- 46 507.7

-

242 904.9

- 75 549.5

20.7

23.7

17.6

Sources: Federal Statistical Office, own calculations

German imports also dropped considerably in the second quarter. Compared to the same quarter last year, imports fell by 46.5 billion euros or 17.6 percent to just over 218 billion euros. The strongest decreases in nominal terms were seen in imports from France (down five billion euros or 29.7 percent), followed by imports from the Netherlands (down 4.5 billion or 18.4 percent) and the Czech Republic (down 3.5 billion euros or 28.9 percent). Imports from Italy, Austria and Belgium declined by one quarter in each case, while those from the United States only dropped by a less than average 13.3 percent.

Imports from Russia (down 3.4 billion euros) and Norway (down 1.4 billion euros) were down by almost

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

half compared to the previous year, due primarily to the downward trend in prices for fossil fuels. Imports from China and Ireland bucked the trend, going up by 4.5 billion euros or 17.9 percent and 677 million euros or 14 percent respectively.

The latest figures show a drop in exports in July 2020 of eleven percent compared to the same month one year ago. The fall in imported goods and services was slightly more pronounced at 11.3 percent.

Exports to the euro area, which fell by 15 percent, dropped considerably more than exports to EU countries outside the euro area (down 10.4 percent). Exports to countries outside the EU fell by 12.4 percent.

In the first seven months of the current year, German imports dropped by a total of 10.4 percent.

Goods and services imported from EU countries dropped by 12.8 percent compared to one year ago.

Imports from EU countries that are not in the euro area dropped slightly less sharply (down 11.3 percent) than imports from the euro area (down 13.5 percent). Imported goods and services from non-EU countries to Germany fell by 7.5 percent in the same period.

Labour market: impact of coronavirus crisis on unemployment fades The downward trend in employment triggered by Covid-19 appears to have come to an end. According to preliminary figures from the Federal Statistical Office, the number of persons in employment increased by 53,000 in July following seasonal adjustment. In May and June the working population had German labour market* 34

4 Unemployed persons (right axis)

33

3

32 2 31

Employed persons covered by social security (left axis) 1

30 0

29 2

28 2012

2013

2014

2015

2016

2017

2018

2019

-1

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

decreased by 205,000 and 34,000 respectively. Compared to July 2019, the working population was down by 1.4 percent to 44.69 million persons. The downward trend in employment subject to social security contributions has slowed. According to projections from the Federal Employment Agency for June 2020 (latest figure available), a total of 33.34 million individuals were employed in jobs subject to social security contributions. That is 62,900 individuals or 0.2 percent less than one year ago. Fulltime employment subject to social security contributions dropped by 144,000 or 0.6 percent year on year, while part-time employment subject to social security contributions actually went up by 82,000 or

6

Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

0.9 percent. Other forms of employment decreased compared to one year ago. In the second quarter 2020, the number of self-employed including contributing family members went down by 140,000 or 3.4 percent to 4.02 million. According to preliminary projections from the Federal Employment Agency, the number of persons exclusively in marginal employment dropped by 346,000 or 7.4 percent to 4.30 million in June. In August, the number of unemployed persons increased by 636,000 or 27.4 percent to 2.96 million (year on year comparison). Following seasonal adjustment, unemployment dropped for the second consecutive month. The unemployment rate in August 2020 was 6.4 percent as calculated by the Federal Employment Agency or 4.4 percent according to the ILO definition.

Strong rebound in incoming orders for Germany industry following coronavirus shock In July 2020, incoming orders for German industry increased by 2.8 percent compared to the previous month following price, calendar and seasonal adjustment. Following a record increase of 28.8 percent in June and 10.4 percent in May, this figure marks a slight slowdown in the recovery. Year on year, incoming orders are still down 7.3 percent but compared to April (down 36.9 percent) the gap has narrowed considerably. Domestic demand dropped by 7.2 percent compared to the previous month on account of the spike in large orders that month. Demand from abroad went up by 14.4 percent. Orders from within the euro area (up 7.3 percent) were much less dynamic than those from the remaining countries (up 19.2 percent).

New orders, manufacturing 24.4

115

25

110 15

105 100

5

95 -1.1

90

-5

-2.5

85 -15

80 75

-22.6

-25

70 65

-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

Altogether, incoming orders in the second quarter 2020 following calendar and seasonal adjustment were 22.8 percent lower than in the first quarter 2020. This is not remarkable considering the strong upward trend seen in the first two months of the first quarter. Compared to the same period last year, incoming orders were down by one quarter (down 25.6 percent). A bigger drop in incoming orders has only ever been recorded in the first two quarters of 2009.

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

Among the main groups of industrial goods, producers of intermediate goods received 22.4 percent less orders in the second quarter than in the previous quarter. The decrease in demand from at home and abroad was roughly similar in magnitude. Compared to the same period last year, orders were down by 20.7 percent after the previous year’s level had still been maintained in the first quarter 2020.

Demand for capital goods in the second quarter was down by 24.8 percent compared to the previous quarter. While domestic demand dropped by only 8.6 percent, demand for capital goods from abroad collapsed by 33.8 percent. Compared to the previous year, capital goods producers received 30.5 percent less orders. In this sector too, a bigger decrease in orders has only ever been recorded in the first two quarters of 2009.

Among consumer goods producers orders in the second quarter were down by 8.4 percent compared to the previous quarter. The decline was roughly the same for domestic and foreign demand.

Year on year, orders were down by 8.3 percent.

The latest figures show an increase in incoming orders for industry, but the backlog of orders has not risen. This is particularly true for consumer goods producers and capital goods producers. The order backlog for capital goods producers was at 3.6 production months at the beginning of the third quarter according to figures from the ifo Institute, which is only slightly under the ten-year average. Among consumer goods producers the order backlog is much lower at 1.9 months. This figure is also only just under the ten-year average. Only the producers of intermediate goods are in the different situation.

Their order backlogs rose for the first time in three quarters. These companies currently have an order backlog of 2.7 production months which is only 0.1 production months below the ten-year average.

The figures published by the Federal Statistical Office on the order backlog covers the total of incoming orders at the end of the reporting month that have not yet resulted in sales and that have not been cancelled. According to these figures, the price-adjusted order backlog in June was 1.4 percent higher than in the previous month following seasonal and calendar adjustment. Open domestic orders increased by 5.2 percent compared to May 2020. The backlog of foreign incoming orders dropped by 0.3 percent in the same period. Compared to February 2020 – before the beginning of the restrictions imposed due to the coronavirus pandemic in Germany – the backlog of orders in June 2020 was 1.3 percent lower following seasonal and calendar adjustment. After the trough in April, incoming orders have been pointing upwards with double-digit growth. However, this should not blind us to the fact that a return to normalcy is still a long way off.

Industrial production picking up again since May After two months of crashing, the trend turned in early summer. In July 2020, industrial production increased by 2.8 percent compared to the previous month and following seasonal and calendar adjustment. This followed a rise of ten percent in May and 11.1 percent in June. Manufacturing has thus weathered four record months with two highly negative and two highly positive results. Unlike most sectors, the construction industry and the energy industry both registered lower production levels compared to the previous month, declining by 4.3 percent and 0.6 percent respectively. Overall, output in the production sector increased by 1.2 percent in July 2020 compared to June. Year on year, however, output is still down by ten percent.

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

Production, manufacturing 110

20 13.4

15 10

100 5 0 -1.7 -1.9

90

-5 -10 -15

80 -20 -25 -19.2 70

-30 2016

2017

2018

2019

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 Statistical Office

Following a slight revision of the June figures, industrial production in the second quarter 2020 dropped by 19.2 percent compared to the first quarter following seasonal and calendar adjustment, after a decrease of 1.9 percent in the first quarter 2020. This was the eighth consecutive quarterly decline in production. Year on year, the trend in production was also negative, with a drop of 22.6 percent setting a new record. During the global financial crisis in 2009, the steepest fall was 21.5 percent. Energy production decreased by 10.4 percent compared to the previous quarter following seasonal and calendar adjustment. Year on year, energy production dropped 12.6 percent. Output was negative even in the construction industry compared to the previous quarter (down 3.9 percent). Year on year, however, production increased by a slim 0.9 percent.

Among the main groups of industrial goods, production in the second quarter 2020 developed as follows: producers of intermediate goods cut output by 16.6 percent compared to the previous month and 17.4 percent compared to the same period last year. Capital goods production decreased quarter on quarter by just under one quarter (down 24.9 percent) and by 31 percent year on year. The producers of consumer goods reduced their production by 10.1 percent compared to the previous quarter and 11.2 percent compared to the same period last year.

A recovery set in directly after the record decline. Although production has now increased for three months in a row (compared to the previous month) manufacturing is not yet out of the woods. For the first seven months of the current year, production is still down 13.8 percent compared to last year. In view of the below-average capacity utilisation rate and weak foreign demand it should still take some time for production to return to pre-crisis levels.

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

Production development in the manufacturing industry year on year change in percent 2018 2019 2019 2020 year Q4 Q1 Q2 original value calendar adjusted

compared to previous period in percent 2019 2020 Q4 Q1 Q2 May Jun Jul seasonally and calendar adjusted

Production

0.9

-3.3

-4.0

-5.0

-18.5

-1.1

-1.0

-16.1

7.4

9.3

1.2

Industry

1.1

-4.2

-5.0

-6.6

-22.6

-1.7

-1.9

-19.2

10.0

11.1

2.8

Intermediate goods

0.6

-3.6

-4.6

-3.5

-17.4

-0.8

1.0

-16.6

-0.7

5.2

4.0

Capital goods

0.9

-4.5

-6.7

-10.8

-31.0

-3.2

-5.0

-24.9

27.3

18.2

2.1

Consumer goods

2.9

-4.7

-1.3

-2.3

-11.2

0.3

-0.4

-10.1

1.8

7.4

1.8

Energy

-1.5

-7.2

-5.6

-8.2

-12.6

3.1

-2.2

-10.4

1.3

6.9

-0.6

Construction induytry

0.2

3.3

1.8

6.8

0.9

0.1

4.9

-3.9

0.1

2.3

-4.3

Construction industry proper

7.7

5.9

5.1

9.0

3.8

0.8

4.6

-1.9

1.1

-0.5

-0.5

Finishin indutry

-5.5

1.0

-0.6

4.8

-2.0

-0.5

5.1

-5.9

-0.8

4.9

-7.7

Sources: Federal Statistical Office, own calculatons

Capacity utilisation recovers from record low As soon as the general contact restrictions were eased in May, economic activity started picking up again, pushing up the utilisation of production capacities in manufacturing. The capacity utilisation rate in industry increased by 4.5 percentage points at the beginning of the third quarter, climbing to 74.9 percent. This was the strongest increase seen since records began on these figures. Capacities are however still being utilised 9.5 percentage points less than on average in the last ten years. The utilisation rate in manufacturing excluding food increased slightly more in the same period (by 4.6 percentage points) but was also far below the average of the last ten years (10.2 percentage points).

The individual industries showed a mixed picture. Capacity utilisation in the chemical industry and pharmaceuticals went against the overall trend in the third quarter, declining further although only slightly. In the electrical and electronics industry and in machinery manufacturing, the latest figures show capacity utilisation pointing down. A clear recovery was registered by vehicle production with capacity utilisation rising 27.8 percentage points compared to the previous quarter. In the furniture industry, capacity utilisation increased by 15.9 percentage points, bringing the level above the ten-year average. Capacity utilisation also rose among producers of textiles and food, beverages and tobacco.

Steep drop in manufacturing revenue In the second quarter, manufacturing saw revenue nose-dive by 23.8 percent compared to the same period last year. The drop in domestic sales of 19.5 percent was not quite as drastic as in foreign sales

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

(down 28.1 percent). Revenue was particularly low in April (down 31.5 percent) and May (down 30.5 percent). The downward trend slowed in June when revenue only declined by 8.7 percent year on year.

As the slump in sales triggered by Covid-19 only began in March, the drop in manufacturing revenue for the first six months of 2020 was a nominal 13.9 percent (domestic: down 11.1 percent; foreign revenue: down 16.6 percent). Among the individual industries, producers of motor vehicles and motor vehicle components were the worst hit by far with revenue tumbling 27.8 percent in the first six months of the year. The producers of textiles, clothing and leather goods saw revenue drop by 15 percent.

Machinery manufacturing also took a beating with revenue down by 13.1 percent. The metal production and metalworking sector fared even worse with a decrease of 14 percent, while revenue in the electrical and electronics industry contracted by almost ten percent. Single-digit drops in revenue were recorded for the first six months of the year by the chemical industry (down 5.7 percent) and pharmaceuticals (down 8.9 percent). Revenue among producers of food and fodder (up 4.2 percent) bucked the overall trend. Including the production of beverages and tobacco products, sales in the food industry rose by 2.8 percent.

Manufacturing revenue* for first six months 2020

Food, beverages, tobacco

2.8

Chemical industry

-5.7

Pharmaceuticals

-8.9

Rubber, glass, ceramics, stone, industrial minerals

-8.9

Paper

-9.2

Electrical and electronic industry

-9.8

Machinery manufacturing

-13.1

Other transport equipment production

-13.8

Manufacturing overall

-13.9

Metal production and metalworking sector

-14.0

Textiles, fashion, leather Motor vehicle production

-15.0 -27.8

*change in percent, year on year Source: Federal Statistical Office

ifo business climate index increases for fourth consecutive month In August 2020, the ifo business climate index for Germany increased for the fourth consecutive time. While the factor brightening up sentiment from May to July was an improved rating of business prospects, it was the current business component that pushed up the dial in August. For the first time since April 2019, most companies surveyed were positive both about their current situation and prospects for the next six months. Among the individual sectors, business sentiment increased sharply in the service sector. Service providers were much more positive about their current situation. They were also more optimistic about the next six months. Sentiment in retail and wholesale only improved marginally. Although retailers were somewhat more satisfied with current business, their prospects remained pessimistic. Sentiment among wholesalers even deteriorated somewhat. In mainstream construction, business sentiment improved as construction companies are very satisfied with current business although they remain subdued about their prospects for the next six months. The business

11

Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

climate index for manufacturing rose for the fourth month in a row, with the situation component being mainly responsible for the increase in August. Nonetheless, the majority of companies surveyed still view their current situation as negative. Prospects improved slightly in August, and most companies have regarded their prospects as positive since June. The barometer for manufacturing has been steadily pointing upwards for more than three months now. The export prospects of industry have clouded over slightly but are still regarded as positive by most companies.

ifo Business-Cycle Clock German manufacturing*

Business expectations for the next six month

30 Upswing

Jan 2011

August 2020

20 10

Boom

Jan 2014 Jan 2018

Jan 2017

Jan 2010

0

Jan 2020

-10

Jan 2016 Jan 2015 Jan 2012 Jan Jan 2019 2013

-20 -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

Outlook Economic slump set to be slightly milder than during financial crisis year 2009 The Covid-19 crisis has plunged the German economy into the worst downturn since the beginning of quarterly accounts in 1970. At the same time, the strength of the economic recovery that set in towards the middle of the year means that economic output in the first six months of the year was not as low as we had been expecting. We thus need to revise our spring growth forecasts (BDI 2020a).

In the first six months of 2020, private consumption sank by 7.4 percent in real terms. The loss of income, impending unemployment, and less opportunities for consumption during the lockdown were the main factors driving down consumption. The environment for consumption has improved considerably in the second half of the year. The measures to contain the spread of the coronavirus pandemic have been eased. Parts of the economic package adopted by the federal government such as the

12

Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

temporary reduction of VAT and the bonus for households entitled to child benefit have come into effect in the second half of the year. A further positive factor is that the situation on the labour market has stabilised over the summer months. The number of employees on short-time work has declined substantially. The working force increased for the first time since the outbreak of the Covid-19 pandemic and in July and August, the seasonally-adjusted number of unemployed went down. The consumer climate, as measured by the consumer research institute GfK, clouded over slightly in September but has nonetheless increased solidly over three consecutive months since the low in May. In July, retail sales even climbed above the previous year's level. This has prompted us to revise our forecast of consumption expenditure by private households to minus 5.5 percent for the current year. State consumption expenditure increased by 3.2 percent in real terms in the first six months of the year according to figures from the Federal Statistical Office. According to the forecast of the federal economics ministry, public expenditure is set to increase further so we now predict state consumption expenditure to increase by 4.8 percent in real terms. Contrary to our previous expectations, consumption expenditure for the year will thus only go down by 2.8 percent in real terms.

BDI forecast for 2020: Change in real economic output over the previous year in percent Actual figurs 2019

2020

Federal Government 2020

European Commission 2020

GDP, real

0.6

-5.4

-6.3

-6.5

Consumption

1.9

-2.8

-

-

- Private Consumption

1.6

-5.5

-7.4

-8.3

- Public Consumption

2.7

4.8

3.7

2.8

2.5

-6.1

-5.0

-5.8

- Machinery and Equipment

0.5

-20.0

-15.1

-17.0

- Construction

3.8

2.0

-1.0

-

- Other

2.7

-3.0

2.0

-

Exports

1.0

-13.0

-11.0

-12.1

Imports

2.6

-10.0

-8.2

-9.2

Net exports, Economic output

-0.6

-2.1

-2.1

-1.9

Investment

BDI

Sources: Federal Statistical Office, Federal Government (May 2020) European Commission (May 2020), own calculations

The overall economic performance for the first six months of the year shows a decrease in investment in plant and equipment of 19.1 percent year on year. There are no indications that the second half of the year will be more dynamic. Despite rising production levels, industrial capacity utilisation is still

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

below the long-term average. Furthermore, domestic demand for capital goods is still pointing downward. We therefore continue to expect a 20 percent reduction in plant and equipment investment.

Regarding construction investment we believe we need to revise our growth forecast. Production in construction was barely hindered by the measures imposed to curb the spread of Covid-19 in the first half of the year. Moreover, the utilisation of construction machinery lies above the long-term average and the order backlog in the industry is so large that it will not be worked off by the end of the year.

The factor limiting growth prospects in construction is rather a shortage of personnel, so we now expecting a two percent increase in construction investment. We have downwardly adjusted our forecast for investment in other assets (software, research and development) to a drop of three percent on account of first quarter performance. We also expect companies not to use up all of their research budgets due to the Covid-19 pandemic. In purely mathematical terms, this would result in a reduction in gross fixed capital formation of 6.1 percent.

Exports did not fall as much in the first six months of the year as we predicted in spring, as the fall was cushioned by the unexpectedly rapid recovery of the Chinese economy. The environment for global trade has also improved somewhat (BDI 2020b), so we have revised our growth forecast for real exports to negative 13 percent. Regarding imports we now expect a reduction of only ten percent.

Net exports would then pull down growth by 2.1 percentage points. All in all, we only expect real economic output for the year 2020 to decline by 5.4 percent compared to the previous year.

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

Sources BDI (2020a). Quarterly Report Germany II / 2020. Strong signals in tough times | Economic stimulus package to ward off deep recession. 9 July. Berlin --- (2020b). Globaler Wachstumsausblick. Gefährdete Erholung | Impulse für die Wirtschaft nötig.

8 September. Berlin.

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 Editorial/Graphics Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu

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Economic low in second quarter has bottomed out | Return to pre-crisis levels only expected in 2022 01/10/2020

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

Q2

1.3

1.9

1.0

0.1

0.6

0.1

-1.7

-7.3

-Private consumption

1.3

1.6

0.9

0.0

0.3

0.1

-2.5

-10.9

-Public consumption

1.4

2.7

1.3

0.3

1.4

0.3

0.6

1.5

3.5

2.5

1.5

-0.4

-0.1

-0.2

-0.5

-7.9

-Machinery and Equipment

4.4

0.4

1.0

0.0

-1.4

-2.0

-7.3

-19.6

-Construction

2.5

3.8

2.6

-1.0

0.3

0.4

5.1

-4.2

-Other

4.3

2.7

-0.7

0.9

1.2

1.1

-4.1

0.6

Domestic demand

2.1

1.2

0.3

0.1

-0.3

0.3

-1.4

-7.2

Exports

2.1

1.0

1.6

-1.6

1.3

-0.3

-3.3

-20.3

Imports

3.6

2.5

0.9

-0.4

0.0

0.3

-1.9

-16.0

Total

1.5

0.6

0.6

-0.5

0.3

0.0

-2.0

-9.7

Consumption

Investment

Contribution to growth (in percentage points) Consumption

1.0

1.3

0.7

0.0

0.4

0.1

-1.2

-5.4

-Private consumption

0.7

0.8

0.5

0.0

0.1

0.0

-1.3

-5.7

-Public consumption

0.3

0.5

0.3

0.1

0.3

0.1

0.1

0.3

0.7

0.5

0.3

-0.1

0.0

-0.1

-0.1

-1.7

-Machinery and Equipment

0.3

0.0

0.1

0.0

-0.1

-0.1

-0.5

-1.3

-Construction

0.3

0.4

0.3

-0.1

0.0

0.1

0.6

-0.5

-Other

0.2

0.1

0.0

0.0

0.1

0.0

-0.2

0.0

Change in stocks

0.3

-0.9

-0.8

0.1

-0.7

0.2

0.0

0.3

Domestic demand

2.0

1.0

0.3

0.1

-0.3

0.2

-1.3

-6.9

-0.4

-0.4

0.3

-0.6

0.6

-0.3

-0.8

-2.8

Investment

Net exports

Source: Destatis

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