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Germany Suffers Second Largest Contraction Since Unification. And There’s More To Come.

"The recovery began with the cautious lifting of the lockdown at the beginning of May, but..."

The Germany economy shrank the most in more than 10 years during the first quarter, and thanks to a revision to Q4, the country is already in a recession.

Output contracted 2.2% in Q1 after a 0.1% contraction in 2019’s final period, the statistics office said Friday.

“Although the spread of the coronavirus did not have a major effect on the economic performance in January and February, the impact of the pandemic is serious for the first quarter”, Germany said, adding that the 2.2% decline “was the largest decrease since the global financial crisis of 2008/2009 and the second largest decrease since German unification”.

For reference, the worst print in modern history was -4.7% in Q1 2009. One certainly imagines the second quarter of 2020 will rival that – and then some.

The figures released on Friday capture only the first couple of weeks of lockdowns in Germany, which, recent concerns about flare-ups at meatpacking facilities notwithstanding, did an admirable job of containing the virus.

The German economy came into 2020 hobbled by a deep industrial recession, brought on by the protracted trade war and Brexit uncertainty. The country managed to dodge a technical recession on several occasions in 2019 – but no more. The virus sealed its fate.

Berlin has been forced to take steps towards abandoning its legendary “black zero” fiscal policy in an effort to ameliorate the blow from the crisis. Last month, 370,000 Germans lost their jobs.

To be sure, Germany’s economy – the largest in Europe and the fourth-largest in the world – is holding up better in the face of the meltdown than its European peers.

On the whole, Europe contracted the most since the inception of the single currency in Q1, data out last month showed. Contractions in Spain, Italy and France were horrendous. The second quarter figures are expected to be mind-boggling. (For the full account, see here).

“If today’s data are the result of two weeks of lockdown, three more weeks of lockdown and a very gradual lifting of some measures do not bode well for the second quarter”, ING said, in an e-mailed quick take on Germany’s numbers.

On the bright side, the bank notes that “more real-time data, such as Google mobility data, shows activity had already accelerated by mid-May, while (social and economic) activity slowed down to 60% of its January level during the peak of the lockdown, it has now returned to more than 80%”.

Between the lifting of lockdown protocol, and fiscal aid on the order of 30% of GDP, the German economy may meander out of the crisis earlier (and in a better position) than its European peers, although that’s a pretty low bar.

Additionally, one should note that a renewal of trade tensions between the US and China risks putting the German economy back on its heels or, at best, hampering recovery efforts.

“The recovery began with the cautious lifting of the lockdown at the beginning of May”, the German Economy Ministry said Friday. “But this process will take a longer time due to the continuation of the corona pandemic”.

Indeed.


 

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