EconoMatters

Germany’s COVID 19 Comeback Story

Germany looks at a solid, but uneven economic rebound from the pandemic, largely based on a pronounced home bias in economic activity.

Credit: Mathias Liebing www.flickr.com

Takeaways


  • The German experience with COVID 19 can offer vital insights into the trends shaping the recovery story across other countries in the advanced world.
  • German economic data reveals a pronounced home bias. As people isolated they ordered more things for their homes over the internet.
  • German GDP should reach its pre-pandemic level in about 18 months, in the first quarter of 2022. That would put it one quarter ahead of the US -- and two quarters ahead of the Eurozone average.
  • Germany is more dependent on external trade and has managed to contain the virus better than most other major economies.
  • The recovery of Germany’s cross-border trade is starting close to home. Orders from Eurozone countries are snapping back more strongly than those from more far-away places.

Like all countries, Germany has its own special traits. It is more dependent on external trade and has managed to contain the virus better than most other major economies.

Nonetheless, the German experience can offer vital insights into the trends shaping the recovery story across other countries in the advanced world. In many respects, the German data reveal a pronounced home bias.

Because people are spending more time at home than usual, Germans bought more over the internet and also cooked more for themselves in the second quarter of 2020.

During the gradual re-opening of the economy from late April onwards, they first went out to buy more gadgets to improve their homes and gardens. Consumer demand has thus rebounded faster than industrial production.

The trade dimension

In a similar vein, the recovery of Germany’s cross-border trade is starting close to home. Orders from Eurozone countries are snapping back more strongly than those from more far-away places.

Looking ahead, Germany looks set for a solid economic rebound in GDP in the third quarter of 2020. This applies even if — amid some renewed concerns about the spread of the virus — retail sales were to stagnate for a few months after their strong performance so far.

Of course, the base effect helps. Any quarter that does not include a lockdown month such as April must look significantly better than the performance from April through June.

The gap between resilient retail sales and still significantly weaker industrial output suggests that companies and stores have begun to reduce inventories. If so, some rebuilding of inventories can give the economy a modest boost in the next three months.

The services sector will continue to suffer

While retail sales barely budged throughout the pandemic, German consumers did make much less use of some key services, such as restaurants and gyms.

Germans also saw their doctors, physiotherapists and hairdressers less often than usual. A more normal use of such services should add to the recovery in consumption over the summer and autumn.

Meanwhile, the travel and entertainment sector will probably remain depressed until the pandemic is fully under control throughout much of the world.

As the tick-shaped recovery will likely flatten over time, German GDP should reach its pre-pandemic level of the last quarter of 2019 in the first quarter of 2022. That would put it one quarter ahead of the United States and two quarters ahead of the Eurozone average.

Germany must remain diligent

Of course, it all depends on the virus and the response to it. Although the rise in confirmed infections remains shallower in Germany than in many other European countries, those numbers need to be watched closely.

The German infection rate looks set to rise further for a while, as more tourists return from their summer vacations.

Still, Germany is now much better prepared for a rise in cases than it was some five months ago when the virus first struck the country.

Clusters can be identified and isolated faster than before, the vulnerable can be protected better and the medical system seems to have more spare capacity than usual.

Thus, it would seem that modest, targeted and regional measures will suffice to contain the pandemic.




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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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