Official statistics just released indicated a worse than expected decline in Germany’s GDP. The Q2 of negative 10.1 % follows a less sharp contraction in Q1. This is the most severe quarterly decline in economic activity in Germany since then end of the Second World War and the establishment of the Federal Republic. Germany is Europe’s largest and most successful economy, and the decline reflects the widespread economic damage being inflicted by the Coronavirus pandemic.
Optimists will point to a likely strong rebound in Q3, as economic activity picks up with a reduction in Covid-19 lockdown measures. Such a rebound is likely to be temporary. The renewal of Covid-19 outbreaks in various hotspots throughout Europe, and forecasts of a second pandemic wave this Fall, are predictive of future bad economic news. In addition, the export-dependent German economy will likely be buffeted by Coronavirus infection rate increases in many of its major export markets, in particular the United States.
The latest German economic data reinforces the growing consensus that the pandemic-driven global recession, already the worst since the Great Depression of the 1930s, will likely evolve into a full-blown economic depression lasting many years.
The ifo index of 7000m German businesses and their perception of business trends registered a decline from 103.2 in July to 102.6 in August. The contraction in business confidence was more than analysts had forecast, and is a sign of growing worry among business decision-makers in Germany as many large markets within the Eurozone for German goods face a profound economic crisis related to the ongoing debt crisis.
While Germany remains the largest economy within the Eurozone, the ifo index for Augusts shows that Berlin is not immune to the impact of the worsening Eurozone debt crisis. There are many reasons for worry in Germany. Not only is the European sovereign debt crisis inflicting economic damage; Germany is paying a high fiscal price for being the lender of last result within the Eurozone. German taxpayers are being asked to pick up a major portion of the cost of bailouts for Eurozone economies mired in the debt crisis. A combination of diminished exports to Eurozone members and fiscal damage to Germany’s balance sheet does not bode well for future prospects for Germany’s economy.
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Germany’s Federal Statistics Office is reporting that the global economic crisis led to a contraction of 5% in the nation’s GDP during 2009. This was by far the worst drop in economic output experienced by Germany since the end of World War II. Major factors in the decline were a sharp falloff in exports due to the collapse in global trade and the constriction of investment activity.
Berlin is projecting growth of up to 1.5% in 2010. Even if this figure holds true, this will still represent a significant long-term contraction in national GDP from peak potential. More importantly, whatever tepid GDP expansion that is occurring is due almost entirely to government stimulus spending. Any trimming of the government’s fiscal pump-priming may send the German economy back into a steep recession. As Germany is the center of economic gravity for the Eurozone, its economic afflictions will undoubtedly impact every other European economy in significant ways.
