Road to recovery

The English language has borrowed several terms from its Indo-European linguistic sibling. But even as the coronavirus blitz forced us all to take refuge in the comfort of a metaphorical eiderdown, policymakers around the world dug out their dictionaries — and doubtless, their macrofinance textbooks — to understand a policy that has prevented Germany from being as badly affected by other economies.

A version of the country’s famous Kurzarbeit scheme has been implemented across several major economies, from France and Italy to the UK and Canada. Described as an excellent crisis management tool by the IMF, Kurzarbeit (literally: short work) keeps workers in employment and allows businesses a bit of breathing space during recessionary times. The salary subsidy programme allows German employers to reduce working hours for their staff instead of laying them off. As compensation, the government pays 60 per cent of workers’ salaries, although the figure is higher for workers with children.

In practice, this economic bridge means that employees receive 60 per cent of their wages for the hours that they don’t work, while being fully remunerated for actual hours on the job. Staff asked to work only 70 per cent of their normal week — 28 hours instead of 40 — therefore only experience a 10 per cent salary loss, allowing them to keep the bagels and bratwurst on the table. With fewer job losses, consumption remains more or less stable at a time when it is desperately needed.

The Kurzarbeit package is expected to cost the state €10 billion (Dh43 billion) this year, but its effects are already being felt. According to a survey by the German IFO economic institute in Munich, 37 per cent of companies interviewed still had workers on short-time hours in August, down from 42 per cent in July. At the end of the second quarter, Germany’s unemployment rate was 4.3 per cent, far lower than the EU-wide 7.1 per cent rate, and 11 per cent in the US.

The scheme has helped Germany weather a number of previous crises, notably in 2008 when the nation was the only major economy not to be hit by a downturn in unemployment. “Unemployment did not rise in Germany after the 2008 financial crisis like it did in other advanced economies,” notes Anke Hassel, an economist at the Hertie School in Berlin. “It was definitely due in large part to the Kurzarbeit because companies did not have to fire their workers,” she told NPR.

Economic support programme

Traditional fallbacks are not the only weapon in Germany’s arsenal as it rushes to contain the widest economic contraction on record.

Second-quarter economic activity declined by 9.7 per cent, as factories stopped production, trade fairs were postponed, and restaurants and hotels closed. Overall, GDP will fall by 5.2 per cent year on year in 2020, the IFO estimates.

To minimise the effects of what is likely to be the worst recession in 70 years, Germany has rolled out an economic support programme worth €1.1 trillion in March, financed by new borrowing. The amount included a business stabilisation fund of €600 billion, as well as a €50-billion programme to help small businesses and self-employed professionals vulnerable to bankruptcy. Bridging help for sectors hardest hit by the crisis, such as tourism, hospitality, and entertainment amounted to €25 billion from June to August.

In June, the government launched a further €130 billion stimulus programme. It shored up the country’s automotive sector, which represents 5 per cent of its GDP, with €2.2 billion in subsidies on electric cars and another €2 billion for manufacturers and suppliers to spend on research and development. There were also monetary incentives for green investments, VAT tax breaks and extra relief for families with children.

“It’s clear that all of this requires a bold response,’’ Chancellor Angela Merkel told reporters in Berlin in June. “It’s about securing jobs, and keeping the economy running, or getting it going again.”

Adopting new measures

In rolling out these measures, Merkel has abandoned a hitherto-unchangeable policy of running a “black zero” balanced budget. Federal budget deficits above 0.35 per cent of GDP are verboten, thanks to a constitutional debt brake. Germany’s initial reluctance to take on more debt – in effect, to spend its way out of the crisis – received flak from policymakers and allies, although it has since been praised for its fiscal efforts.

The exceptional situation will see the country borrow €96.2 billion euros in 2021 to fund continued stimulus measures. Next year’s budget will focus on economic support, securing employment and health protection, according to Finance Minister Olaf Scholz.

“We are acting decisively, even if it costs a lot of money — doing nothing would be much more expensive for our country,” he said after the budget for 2021 was approved.

Scholz, who is in the running to succeed Merkel when she steps down after a general election next year, expects the German economy to return to its pre-crisis size by the beginning of 2022 at the very latest, and hopefully bring the deficit back in line with constitutional requirements.

Early reports indicate that their containment measures may lead to a V-shaped economic recovery, and economists are hopeful that the country has returned to growth in the third quarter.

The IFO’s Business Climate index is almost back to pre-crisis levels in many sectors, as industrial activity has resumed following the easing of shutdown restrictions. The institute expects third-quarter GDP to grow by 6.6 per cent after a drop of 2 per cent and 9.7 per cent in the first and second quarters, respectively. While fourth-quarter performance appears uncertain, the country is expected to continue growing in 2021 with annual growth forecast at 5.1 per cent, possibly putting economic activity back to pre-pandemic levels by the end of next year. GDP will continue to expand in 2022, at an expected rate of 1.7 per cent.

Manufacturing, the country’s economic backbone with about one-fifth of GDP, is forecast to drive much of the growth going forward, although services will likely remain underperforming. Output has continued to rise, posting the fastest growth since February 2018. IHS Markit’s final Purchasing Managers’ Index rose to 52.2 in August, crossing the 50 mark that separates growth from contraction for the second time in 20 months.

We look forward to Q2/Q3 in 2021 for the metal industry to slowly recover. Industries like construction are still doing well because of finishing jobs awarded in 2019 and before.

David S Gower, Business owner

Retail, on the other hand, exhibited a more nuanced picture. Although the sector boomed in May and June with shops reopening and VAT rates remaining low, sales fell unexpectedly in July – by 0.9 per cent, the federal statistics office reported. Nevertheless, in the first seven months of the year, retailers increased their sales by 2.6 per cent in real terms despite the crisis. The HDE retail association now believes nominal sales will grow by 1.5 per cent this year, a sharp upward revision from its previous estimate for a 4 per cent drop, Reuters reported.

Other sectors may need more time.

David S Gower is owner of Newform, a foundry supplier of mica linings for furnaces in ferrous and non-ferrous foundries, as well as mica tapes for the cable and electrical HV motors industry. Speaking to GN Focus about the metal sector, he described the second and third quarters of this year as “horrible”, after a “perfect first quarter”.

“We look forward to Q2/Q3 in 2021 for the metal industry to slowly recover,” he says. “Some industries like construction are still doing well because of finishing jobs awarded in 2019 and before.” Gower is also President of TiE Germany, a non-profit organisation that promotes entrepreneurship.

Going forward, exports remain a particular area of concern, and hospitality, aviation and tourism and services may be in for a significant cold spell.

Ready for a second wave

For now, all attention is on a possible second wave of Covid-19, which could bring new lockdowns and a new reduction in economic activity. With coronavirus infections rising across Europe for weeks, Merkel warned that the daily number of new cases could hit 19,200, the German daily national newspaper Bild reported. By comparison, at the peak of the crisis in late March and early April, Germany was reporting more than 6,000 new cases a day.

“Germany is trying to delay a possible lockdown as much as possible, while enforcing social distancing measures, TiE’s Gower says. “However, with higher numbers of infections, the autumn and winter could be difficult to handle. If the second wave is anything like the first, companies will lose their market without creative solutions. On the flip side, sectors dealing with digital and technological advances such as artificial intelligence, the internet of things and tele-health will do well.”

Dr Philipp Scheuermeyer, an economist at the state-owned development bank KfW wrote in a recent paper that while previous experience will enable more targeted and regional containment measures than in the spring, second-round effects such as business insolvencies would probably increase considerably. “As a risk scenario with local lockdowns in autumn and winter, we believe it is plausible to assume that Germany’s economic output would contract by almost 8 per cent in 2020 and grow by just +3 per cent in the next year,” he said.

Beyond the coronavirus, however, several other significant events will affect Germany’s economy. The possibility of the UK crashing out of the European Union without a deal remains another major risk, as does the prospect of an escalation of the trade and geopolitical conflict between the US and China consequent on the results of the US presidential election. “However, short-term negative impact on Germany would be relatively moderate,” Dr Scheuermeyer wrote.

Any recovery could also be affected by an unlikely but not impossible surprise result in next autumn’s federal election. Merkel has promised to step down after 15 years at the helm, but there is no clear successor in sight.

As what seems to be one of the most eventful years in history draws to a close, perhaps we should all look to another German phrase for the period ahead: Ich drücke die Daumen, goes the idiom. Translation? Fingers crossed.