RaboResearch - Economic Research

Germany: Second wave of infections inevitable

Economic Report

  • Although Germany was performing relatively well, the number of new infections has surged recently
  • Even though additional measures have been put in place, and more could follow, it is unlikely that we will return to the situation of the second quarter
  • The government will probably continue to support businesses but with less firepower than it did during the second quarter. Since German companies are very much reliant on banks for financing, government loan guarantees play a vital role

It was just a matter of time

In the past couple of weeks Europe has seen a surge in the number of new infections. Governments have responded to this threat by imposing a number of new containment measures, some of which are just shy of the full lockdown of the second quarter. So far, Germany was able to get away relatively unscathed, since the German approach to handling the pandemic proved successful. But unfortunately, this has only slowed the process instead of stopping the process all together. The number of new cases is growing exponentially in Germany as well now (figure 1). Consequently, the German government imposed a number of additional containment measures, such as closing restaurants and bars across the country. These precautionary measures are probably mitigating some of the economic damage, according to the IMF.

Figure 1: Number of new infections is starting to show exponential characteristics in Germany
Figure 1:  Number of new infections is starting to show exponential characteristics in GermanySource: Macrobond, Eurostat
Figure 2: But the mortality rate remains lower
Figure 2: But the mortality rate remains lowerSource: Macrobond, Markit

Does a second wave imply a second lockdown?

For now, the measures imposed fall short of the lockdown of the second quarter, when schools, non-essential shops and some borders were closed. But even though we expect a further tightening of the measures if the spread of the virus is not contained, we deem it unlikely that there will be a lockdown comparable to the one in the second quarter. First, because the public support for a full lockdown is limited. People have grown tired of the pandemic and Berlin will try to avoid to fuel rising tension where possible. Second, the German government has learned from the first wave and does not necessarily have to apply this ‘bazooka-approach’ a second time. For example, schools will probably remain open to relieve working parents.

Even though extra containment measures will have a significant effect on the economic activity in Germany, we expect the economic damage of a second, lighter lockdown, to be considerably smaller than the damage inflicted by the first lockdown.

Figure 3: Lockdown was less stringent in Germany in Q2
Figure 3: Lockdown was less stringent in Germany in Q2Source: Macrobond, Oxford
Figure 4: And consequently, there was less damage
Figure 4: And consequently, there was less damageSource: Macrobond, National Statistical Offices

A second wave of government support

Besides trying to minimize the direct health damage from the virus, Berlin is also trying to minimize the economic damage from the virus. It has done so during the first wave by providing business with liquidity, direct support and deferring taxes. By doing this generously (figure 5), Berlin has broken with its strict fiscal policies of the past decade. But now that a second lockdown is looming, the question is: will Berlin provide another round of large scale stimulus?

Going forward, we expect Berlin to announce a new package of stimulus which will be more focused and less generous for a number of reasons. First, the German government has to find a balance between keeping viable companies afloat whilst at the same time minimizing the risk of zombifying the economy. Second, in the course of the next year (or later if the ratification process stalls) the funds from the EU recovery fund will come available, which are likely to substitute a part of the national investments. Third, the government has probably realized by now that the virus is probably going to be with us for the foreseeable future. Trying to uphold the level of support of the second quarter until a vaccine is widely available will prove to be costly.

One aspect of the previous support package that will probably be retained are the loan guarantees, since the majority of funding for corporates and SMEs in Europe depends on bank loans. Given the current dire situation of the economy, a credit crunch would be very badly timed. The previous package is not fully depleted yet, but Berlin is likely to keep a close on the situation, especially since banks are tightening their credit standards (figure 6).

Figure 5: Germany’s support for the economy has been relatively generous so far
Figure 5: Germany’s support for the economy has been relatively generous so farSource: RaboResearch
Figure 6: Banks are tightening their lending standards
Figure 6: Banks are tightening their lending standardsSource: Macrobond, ECB

Going forward

Even though the German economy grew by a groundbreaking 8.2% in the third quarter, the German economy is still considerably smaller when looked at from a year-to-date angle. Right now, we have penciled in an economic contraction of 5.8% in 2020 followed by a rebound of 3.4% in 2021. The figures for the third quarter are still in line with our base scenario, which already includes some additional containment measures, but given the quick spread of the virus and the subsequent containment measures it is inevitable that we will have to adjust our forecast downwards.

Erik-Jan van Harn
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 3002 0936

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