What's the secret to Germany's handling of the pandemic?
- There has been a strong increase in the number of COVID cases in Europe, but less so in Germany and Italy
- Germany has shown a superior handling of the pandemic through more testing, better contact tracing and swifter decision mechanisms
- While it is unlikely that governments will impose a second national lockdown, extra measures limiting interactions and gatherings still put a lid on economic activity
- Moreover a high infection rate likely alters consumer behaviour via worsened sentiment and precautionary social distancing
- Therefore, keeping the virus in check is a key component for economic recovery
The second wave
In the past couple of weeks Europe has seen a surge in the number of new infections. Countries have responded by announcing additional containment measures. In Brussels and Paris bars have shut their doors once again and in the Netherlands and a few Spanish cities that meet certain thresholds, such as Madrid, capacity and closing hours of bars and restaurants have been substantially tightened. Moreover, Madrileños are only allowed to leave the city for health reasons, school or work, while non-citizens cannot enter the city without such a reason. However, in Germany the situation still seems manageable. Compared to other Eurozone member states, the number of new infections is still under control (figure 1). As long as the number of new infections doesn’t reach a certain threshold, there won’t be any additional measures. Moreover, next to a relatively small increase in the number of cases, the fatality rate in Germany is also significantly lower (figure 2). The infection rate is closely linked to economic recovery and it is therefore important to dive deeper into the reasons why Germany is doing relatively well.
Timely, organized actions
The most effective way to stop a further spread of the virus when you’re ill, is to simply stop seeing other people. And this simple truth exactly was the line of thinking that drove governments to impose nationwide lockdowns earlier this year, when there was only little information available. But even though this ‘simple’ measure has worked quite well to contain a further spread of the virus in the spring, it doesn’t fully explain the differences within Europe. Germany has not necessarily had the most stringent lockdown measures in place, but has not seen a huge spike in the infection rate (figure 3).
An important factor in containing the virus is early detection and breaking the chain of infections. To do this, test capacity and contact tracing is very important. And precisely on these two points, Germany was and still is ahead of the curve. First, testing: Germany was the first country to develop an actual PCR test based on the genome of the virus, which was released by Chinese scientists late 2019. This enabled Germany to carry out large scale testing at an early stage of the outbreak. Additionally, Germany was one of the first countries to have sufficient test capacity to test people without symptoms as well. Since the virus can be transmitted before there are any obvious symptoms, testing and isolating those infected helps to reduce a further spread.
Second, contact tracing: Germany attempts to break the chain of infections through contacting those that have been in contact with someone who has been tested positive. This is done both by directly calling and informing people from around 400 call centres and through a contact tracing app. Admittedly, other European countries have adopted similar policies, but Germany has directed significantly more resources and capacity to contact tracing and was one of the first European countries to launch a contact tracing app. The app has already been downloaded millions of times.
Additionally, clear communication from the government is likely to help manage expectations and provide a framework for a swift response to outbreaks. The Bundesländer have agreed on a number of thresholds. If these thresholds are exceeded, stricter measures come into effect immediately. This way, the Bundesländer do not have to convene to decide what action to take, losing valuable time, but can take action immediately.
What does this mean for the economy?
Countries with a higher infection rate have implemented stricter measures to flatten the curve. But these measures have damaged the economy as well, the impact on GDP so far has been larger for countries with stricter measures.
The number of infections can affect GDP in two ways. Directly, through stricter measures (figure 5), that constrict the supply side of the economy through the closure of bars, restaurants and shops for example. A rise in infections can also impact GDP indirectly through affecting consumer and business confidence and inducing precautionary behaviour (figure 6), which affect consumption and investments. This will hit countries such as Spain and Italy, which are more reliant on vulnerable sectors such as tourism and hospitality, in particular.
If the infection rate continues to rise in Europe, we can expect stricter measures (and consequently weaker recovery or even an economic contraction) in the Netherlands, France and Spain if the rise of infections does not slow soon. For Italy and Germany the situation seems under control for now, but politicians are well aware that the situation could change for the worse.
Does a second wave imply a second lockdown?
For now, we deem it unlikely that there will be a second round of national lockdowns. First, because of the limited public support that such a lockdown would have. Second, because governments are now better equipped to apply targeted measures to contain the virus. Moreover, governments are well aware of the serious side effects of a strict lockdown (both from an economic as from a health point of view).
However, given the current trend in the number of new infections, it does seem inevitable that additional measures will be put in place in several countries. These measures are likely to include limits to free movement across borders, closing bars and restaurants and enforcing working from home stricter. These measures, although less stringent than a full lockdown, still have their effect on the economy. Measures limit the supply side of the economy and affect consumer and business confidence, as we argued before.
If Germany can keep the virus under control, without having to resort to measures that would severely limit economic activity, the economic recovery of Germany could be swifter than that of its European peers. Consequently, other countries would do well to see if there’s something to learn from Germany’s approach.
We are still comfortable with our current economic forecast for Germany (GDP growth of -5.8% in 2020 and 3.7% in 2021), which projects the economy to be back at 2019 levels at the end of 2022, but will adjust our view if additional measures are implemented.
 The fatality rate is dependent on a great number of additional factors besides government policy.
 Other countries have already, or are set to follow this way of decision making.