German economy shrinks by record 10.1% in Q2 on virus hit

The German economy shrank by a record 10.1 percent in the second quarter as coronavirus lockdowns took their toll, official data shows, but experts say a recovery is already under way.

Federal statistics agency Destatis called the quarter-on-quarter decline in gross domestic product “historic” and far bigger than any slump seen during the 2008-2009 financial crisis.

Economy Minister Peter Altmaier had warned earlier this year that the pandemic would push Europe’s top economy into “the worst recession” in its postwar history, ending a decade of growth.

Analysts had expected a slightly smaller contraction of around nine percent for the April-June period.

Destatis said efforts to contain the COVID-19 outbreak had led to “a massive slump” in exports and imports, although government spending had increased over the period.

The agency also revised its first quarter data, saying German output declined 2.0 percent from January to March instead of the previously announced 2.2 percent.

But the worst pain may already be over.

Thursday’s data “is nothing more than a look in the rearview mirror”, ING bank economist Carsten Brzeski said, expecting to see “a strong rebound” in the third quarter.

But the road to recovery would be “uneven” and long, he warned, with government stimulus likely to buoy services and construction at home, while the rebound in manufacturing will depend heavily on foreign demand and how other nations cope with the virus fallout.

For the whole of 2020, the German government forecasts that GDP will contract by 6.3 percent before expanding by 5.2 percent in 2021.

By contrast, the European Commission expects the economies of France, Italy and Spain to shrink more than 10 percent this year.

Avoiding layoffs

Germany has withstood the coronavirus shock better than many of its neighbors so far.

Stable infection rates saw it reopen factories, shops and restaurants from early May, allowing economic activity to pick up earlier than in other European nations.

Germany has also been able to avoid mass layoffs thanks to subsidized shorter-hours schemes, with separate data on Thursday showing unemployment held steady at 6.4 percent in July, the same rate as June.

Chancellor Angela Merkel’s government, criticized in the past for sitting on fat budget surpluses, has gone to unprecedented lengths to cushion the economic impact from the crisis.

It has ditched its no-new-debt dogma to unleash 130 billion euros in stimulus ($153 billion) aimed at spurring investment and consumer spending, including through a temporary cut in value-added tax.

It has also rolled out huge rescue packages worth over a trillion euros to shield companies and employees, helping the likes of Lufthansa and TUI travel stay afloat and preserve thousands of jobs.

Germany’s bounce-back should also get a boost from the European Union’s 750-billion-euro coronavirus recovery plan, Altmaier has said.

Second wave fears

Better-than-expected business and consumer confidence surveys recently suggested Germans are feeling more optimistic about the future.

But concerns have grown over a spike in COVID-19 cases at home and across Europe, partly fueled by summer travel.

As an export powerhouse, Germany is highly vulnerable to virus setbacks in other countries that could lead to renewed shutdowns that once again disrupt supply chains and suppress demand.

In April and May, at the height of the global lockdowns, German exports plummeted around 30 percent year-on-year.

Germany’s mighty industrial sector, already hurting from US-China trade tensions and Brexit uncertainty, has been especially hard hit.

Car manufacturing alone fell 40 percent year-on-year over the first six months of 2020, reaching a 45-year low.

ING analyst Brzeski said German exports would take time to return to pre-pandemic levels, leaving the country to rely on domestic demand to power its rebound.