‘We Finally Have A Number’: German Economy Logs Largest Contraction In Recorded History

“Massive slump” — that’s how Germany’s Federal Statistical Office described the worst quarterly performance on record for the world’s fourth-largest economy.

“The crisis finally has a number”, ING declared, in a quick reaction note. That number is 10.1%, and it represents the biggest contraction since the beginning of quarterly GDP calculations for Germany in 1970.

By comparison, the German economy slumped “just” 4.7% in the first quarter of 2009, during the financial crisis.

The YoY print is -11.7%. That too is the worst figure on record. In the second quarter of 2009, Germany contracted 7.9% on year. Simply put: COVID-19 makes the GFC appear tame by comparison.

This is not, of course, a surprise. It just confirms what needed no confirmation. Namely that the world just lived through an economic event that will be enshrined not just in textbooks, but in history books more generally.

“A massive slump was recorded for exports and imports of goods and services as well as for household final consumption expenditure and capital formation in machinery and equipment”, Germany said. Obviously, some of that was offset by higher general government spending, and the rebound will hinge in part on the success of the country’s €130 billion stimulus package.

Angela Merkel spearheaded the push to establish a European recovery fund, and the notoriously frugal Germans finally loosened the purse strings in the face of a crisis too deep to be subjugated to notions of fiscal discipline.

The global economy is nowhere near a full recovery, and external demand will take some time to rebound to pre-crisis levels. That will be key for German exports. New flare-ups of COVID-19 have emerged from Spain to Hong Kong to mainland China to Japan. At the same time, the US, Brazil, and India are struggling to contain what might very fairly be described as acute outbreaks.

Still, things are looking up for Germany, which was generally successful in containing the spread of the virus, disconcerting reports from the meatpacking industry notwithstanding.

“This picture shows the deepest but also the shortest recession ever”, ING remarked, noting that “all monthly indicators since May have pointed to a strong rebound of economic activity in the course of what has been the worst quarterly performance ever”.

PMIs have recovered, and although the labor market suffered a body blow, Bloomberg reminds you that Germany “was also able to utilize long-established support measures that allowed companies to keep millions of staff on payrolls, and prevent a jump in joblessness”.

“Monthly and high frequency data show that activity bounced back since April, so Q3 should see a large positive, but activity will remain well below pre-crisis levels for a long time to come”, Capital Economics said, in a note, adding that going forward, “Germany has several advantages over most euro-zone countries: more fiscal support, including a VAT cut and a generous short-time working scheme; a comparatively low infection rate and strong public health system; and limited dependence on foreign tourists”.

And yet, CapEcon makes the same point about struggles abroad and the impact on German exports. “The economy will be constrained by the ongoing weakness of external demand because of its dependence on exports, so a second wave of infections and confinement measures elsewhere in Europe is a major downside risk”, the same note reads.

ING goes on to warn that although Thursday’s GDP data “marks the trough of the crisis… the manufacturing sector will take much longer to recover, given the disruption of global supply chains, economic weakness in major trading partners and continuing structural change, which had already hampered production prior to COVID-19”.

In a potentially ominous sign, Germany on Thursday logged 839 new coronavirus cases, the most in six weeks.

That’s nowhere close to levels seen during the height of the epidemic, but it’s enough to prompt some observers to label the situation “very concerning”.


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