RaboResearch - Economic Research

Germany: Economic recovery?

Economic Comment

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  • The German economy shrank by a record breaking 10.1 percent in the second quarter
  • Recent figures indicate that the worst is over. Retail sales even show a y/y increase
  • Trade will likely slow economic recovery. Germany is extra vulnerable to the trade implosion through its export basket and trade partners
  • The labor market remains strong through government interventions but the sentiment underlying the labor market is worrying

The German economy shrank by a record breaking 10.1% in the second quarter of 2020, after shrinking a (revised) 2.0% in the first quarter. But for now, the worst seems to be over. But business sentiment now indicates an economic expansion (figure 1), signaling that the trough of the crisis is left behind us.

Argueably, Germany has fared relatively better than its European peers. The French, Spanish and Italian economy shrank by 13.8%,18.5% and 12.4% respectively. But even though sentiment has taken a turn for the better (figure 1), it does not signal a V-shaped recovery. The index is based on a questionnaire that asks respondents to compare their expectations for the coming month with the previous month. Given the much lower activity during the lockdown, it is no wonder that expectations for post-lockdown economic activity are better.

Recent figures in the retail sector paint a prettier picture (figure 2). Consumers have found their way to (digital) stores again, even though savings peaked when the cris struck. This spending spree after the reopening of businesses in May resulted in a y/y increase in retail sales. But even though the total of retail sales saw a y/y increase, there is still significant variation between sectors. The textile and clothing sector saw a y/y decrease of 23% in May for example. This is yet another indication that COVID will have a lasting impact on consumer preferences.

Figure 1: Sentiment indicators indicate Germany is past the worst
Figure 1: Sentiment indicators indicate Germany is past the worstSource: Macrobond, Markit, Ifo
Figure 2: Retail sales are above pre-crisis levels, but vehicles prove to be a drag
Figure 2: Retail sales are above pre-crisis levels, but vehicles prove to be a dragSource: Macrobond, Destatis

Dependence on international trade hampers recovery

The German economy is not only dependent on the domestic control of the virus. With exports making up roughly 40% of GDP, international trade is crucial for Germany. And with the virus still wreaking havoc in the United States and Latin America, international trade has not returned to pre-COVID levels. Moreover, German exports have been hit harder than world trade in general (figure 3). Why? First of all because of the composition of Germany’s export basket. Just over a third of Germany’s exports consist of machinery and vehicle (parts). Business investments in capital goods and car sales have imploded since the start of the crisis (figure 4) by respectively 40% and 75% at its peak. Second, German exports have collapsed because of it’s export partners. While exports to Asia took a big hit (-15%), exports to the rest of Europe (66% of total exports) and the United states (9% of total exports) collapsed by contracting around 30%.

Figure 3: German exports have been hit harder than world trade
Figure 3: German exports have been hit harder than world tradeSource: Macrobond, CBS, Destatis
Figure 4: This is partially due to collapsing car sales world wide
Figure 4: This is partially due to collapsing car sales world wideSource: Macrobond

It will probably take a while before exports are back at pre-crisis levels. Private consumption and business investments have to recover in export destination countries first. And while the virus still rages in the Americas, and unemployment rates remain elevated, this could take a while. Moreover, shifting supply chains, deglobalization and reshoring of vital industries could turn out to have long term effects on German exports.

No spillover to the labor market (yet)

The German governments attempt to shield the labor market from the economic crisis have proved successful so far (figure 5). Kurzarbeit, the furloughing scheme applied in Germany, has prevented the unemployment rate to spike (the United States what the effects on the labor market can be in absence of such a scheme). But it is evident the governments pockets are only so deep and that at some point the program has to be stopped. For now, the plans are to keep the program afloat until the end of 2020.

A second effect that (partially) explains the modest increase in the unemployment rate, is the fact that people leave the labor force once fired. This is evident from the fact that employment dropped by just under a million whereas unemployment only rose by half that figure. Truth be told, the magnitude of this effect is dwarfed by the effect of the Kurzarbeit scheme.

But it is only a matter of time before the effects of the crisis are translated in the unemployment figures. Consumers know that the generous terms in the current Kurzarbeit set-up won’t be around forever. Additionally, consumers can still lose their job if the company chooses to lay them off or if the company goes bankrupt itself. Therefore, it is no wonder that consumer expectations have deteriorated despite government intervention (figure 6).

Figure 5: Unemployment rate has only shown a modest increase
Figure 5: Unemployment rate has only shown a modest increaseSource: Macrobond, Destatis
Figure 6: But consumer expectations for the coming year paint a bleaker picture
Figure 6: But consumer expectations for the coming year paint a bleaker pictureSource: Macrobond, Eurostat
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Author(s)
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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