RaboResearch - Economic Research

Germany: Additional containment measures

Economic Comment

Share:
  • Germany imposes stricter lockdown measures from 16 December until 10 January
  • Non-essential shops, hairdressers and schools will have to close under the new measures
  • The closure of non-essential shops in the final weeks of the year could cost as much as EUR 3.5bn in lost total value added. For January, the estimate is similar
  • Meanwhile, Germany has adapted its 2021 budget. It has been expanded to facilitate extended support, given that current restrictions could last until Spring
  • The budget also earmarks significant funds for structural investment in digital and physical infrastructure, education, digitalization and a green economy

The second wave has not yet receded

In a bid to contain a further rise in the number of infections, Germany will go into a hard lockdown from Wednesday 16 December. In addition to the measures already in place (table 1), schools and non-essential shops will now be closed as well. This results in containment measures very similar to those late March, early April.

Table 1: Containment measures in Germany
Table 1: Containment measures in GermanySource: Federal office for health and education

So far, Germany has been handling the pandemic relatively well (figure 1), compared to its peers. When cases were on the rise again this Autumn, the government implemented a set of additional containment measures on 2 November (figure 2), but these measures have proved insufficient to turn the tide. The curve temporarily flattened but is on the rise again.

Figure 1: Infections in Germany are on the rise again
Figure 1: Infections in Germany are on the rise againSource: Macrobond, WHO, UN
Figure 2: Containment measures in the Eurozone are becoming more stringent
Figure 2: Containment measures in the Eurozone are becoming more stringentSource: Macrobond, University of Oxford

What are the economic implications?

The closure of non-essential shops over the holiday season, traditionally a period of increased sales, will mean a great deal to shop owners which were hoping to make up for some of the damage incurred in the first half of the year. Some of that damage was already made up for during the third quarter. From May, retail sales even recorded strong y/y growth after a period in which consumers held back on their spending, through a shift in consumer preferences (e.g. spending money on gardening instead of restaurants) and postponed demand.

The question is whether this second round of catch-up spending will be as strong as the first one. After all, one does not renovate his/her house twice a year for example. Additionally, one is unlikely to make up for missed seasonal purchases, such as Christmas clothing or gifts, in January. One could therefore make the case that we should not expect a rebound as strong as the one seen during the third quarter, once this new set of containment measures is lifted.

Figure 3: Retail trades recorded a y/y growth after the lockdown of Q2
Figure 3: Retail trades recorded a y/y growth after the lockdown of Q2Source: Macrobond, Destatis
Figure 4: Lockdown stringency is strongly correlated with consumer confidence
Figure 4: Lockdown stringency is strongly correlated with consumer confidenceSource: Macrobond, DGECFIN, University of Oxford

For now, we can only give a ballpark estimate of the impact of these new measures. The three largest sectors affected by the new measures are wholesale trade, retail trade and the automotive sector. In order to get a ballpark estimate we look at the impact in April, where during the first two weeks non-essential shops were closed as well. A simple calculation shows that these measures could cost as much as EUR 3.5bn in lost value added (table 2). Of course, this is just a back-of-the-envelope-calculation. One could say that the damage is likely to be smaller because retailers have had time to develop their online business. On the other hand, one could say that the damage is likely to be larger since retail sales in December are much higher than during the rest of the year (14% in 2019 to be precise). Consequently, closing shops in December leads to more economic damage.

We had already pencilled in a contraction of 1.8% of GDP in the fourth quarter, including a contraction in retail, wholesale and motor vehicle sales. These additional measures put extra pressure on GDP however. The contraction in 2020 will consequently be larger whilst the recovery in 2021 will be weaker than in our current forecast, where we have pencilled in a contraction of 5.8% for 2020 and a growth of 3.0% in 2021.

Table 2: Estimated impact of the new lockdown measures based on output in September and seasonal patterns in 2019
Table 2: Estimated impact of the new lockdown measures based on output in September and seasonal patterns in 2019Note: *True weight may differ slightly. The weight is only available for total wholesale, rather than domestic wholesale trade.
Source: RaboResearch, Eurostat

Fantastic Fiscal Firepower

The German government has recently adapted its budget for 2021. The budget for 2021 anticipates that restrictions could last until Spring. Consequently, the budget is EUR 43bn larger (1.3% of 2019 GDP) than previously envisaged, although still some EUR 95bn smaller (2.8% of 2019 GDP) than the 2020 budget. From 2022 onwards, the budget will return to pre-COVID levels. With this, net borrowing is planned to fall from EUR 217bn in 2020 to EUR96bn next year. This is still significantly higher than allowed under the constitutional debt brake (which does not allow net borrowing to exceed 0.35% of GDP, roughly EUR10bn), which means that the brake will be suspended for another year.

Most of the additional spending will go to extending support measures that are currently in place, but there is also a considerable amount earmarked for investment, around EUR55bn in 2021 and EUR48bn in the succeeding years. Investments will be focussed on digital and physical infrastructure, education, digitalization and the climate-friendly restructuring of the economy. In a previous piece we have argued that all of these topics can contribute significantly to the structural growth of the German economy. So, one can say that there is at least a small benefit of this crisis: structural investment is back on the agenda in Germany.

Share:
Author(s)
Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

naar boven