Recession causing massive demand and supply shock into the economic powerhouse of Europe, Germany in March and is likely to last till the middle of the year.
Germany was beginning to recover from 2019, marked by the impact of trade wars and Brexit fears, bad weather, trade war, changes to car-emissions testing, and low water levels in the Rhine: since 2017. Several shocks have been struck in Europe’s economy which couldn’t be controlled by finance ministers or central bankers and then again the economy was blown from the virus.
What is Brexit?
The EU is an economic and political union involving 28 European countries. Free trade is allowed in the countries which means goods can move between member countries without any checks or extra charges. The Free movement of people, to live and work in whichever country they choose is allowed in the EU. When the UK formally left the EU, Brexit happened, on 31 January 2020. A lot of talks and negotiations are still left.
The effects of the pandemic causing massive demand and supply shock
The brunt of the coronavirus crisis has been felt by Europe in recent weeks, with streets of Paris, Rome, Madrid eerily empty and millions across the continent on lockdown. In Britain, Prime Minister Boris Johnson and his Health Secretary Matt Hancock have both tested positive for COVID-19. Before the pandemic, an industry, in particular, had seen rises in new orders and activity as 2020 got started, the ministry noted.
but during the coronavirus pandemic, given the massive demand and supply shock at home and abroad, economic developments reversed course” for manufacturers. Germany has been in progressively tighter lockdown since mid-March. The protective measures cannot be loosened and after April the growth will be very slow and will only revive slowly. There is a staggering surge in coronavirus deaths in Europe, still days or weeks from what experts desperately hope will be the epidemic’s peak.
To cushion some of the blow, a rescue package totaling 1.1 trillion euros had been passed by Berlin, ranging from guarantees for bank lending to business to a state fund that could buy up stakes in stricken companies if necessary. A scheme that tops up workers’ wages if their employer slashes hours was employed by the federal government to ease access. 725,000 companies had applied for the federal government’s assistance, adding that the number of workers affected will likely be above the 1.4 million companies helped in the 2008-9 financial crisis as stated by the BA federal labor agency. 2.1 million workers will have to fall back on the support as per Berlin’s estimates. The massive demand and supply shock at home and abroad reversed course the economic developments for manufacturers during the pandemic.
The economy of Germany is expected to shrink by more than 1.5% YoY in 2020. The ZEW index, gauging financial analysts’ sentiment and take on the economic situation, plummeted in March, recording the sharpest monthly decline ever. It is the lowest since December 2011, as it fell to -49.5 in March from +8.7 in February. The situation of Germany is fast-moving in all European countries. A lockdown was announced by the chancellor Angela Merkel and he had given general guidelines, all shops were closed except for groceries, pharmacies, banks and gas stations. No more gatherings, no tourism either domestically or internationally, no church services and even playgrounds were closed. The restaurants could stay open until 6 pm. These measures had no end dates, however, these are just guidelines and it shows how the country’s federal system is hampering swift decisions since the implementation of the measures is done by regional states and it differs across different states.
The massive demand and supply shock of Covid-19 and financial market turmoil on the economy
The lockdown will lead to a sharp fall in private consumption to at least 4% in comparison to the last year. The duration of the lockdown in the different regional states will determine how the contraction in consumption and activity will be spread across Q1 and Q2. The German economy is likely to experience a recession in the first half of the year, we are getting close to the GDP data as that was seen during the financial crisis. The fall in exports led the German economy to fall by 1.6% QoQ in 2008 and 4.7% QoQ in 2009. The hits will come from several sides in the current crisis. The currently available information predicts that The German economy to shrink by more than 1.5% YoY in 2020. The German government’s reaction to the economic impact of Covid-19 and the ongoing financial market turmoil has been very similar to that of other governments. Huge amounts of investments in R&D are made to find a vaccine and to equip the health care sector, existing longer-term investment plans are being stepped up, tax deferrals, an easing of the hurdles to apply for short-time work schemes and an increase in government support for these schemes. Bank guarantees and liquidity support of more than €500bn are also being provided.
The measures taken by the government like tax forbearance, temporary tax cuts or the government taking over rent or other cost payments from SMEs and even additional measures will be insufficient to avoid a recession in the first half of the year, but they could pave the way towards a solid path to a strong recovery. The German economic output will slash by 5.4% from 2.8% due to the pandemic as stated by a panel of economists. The economic impact caused by Covid-19, cannot be justified by the impressive measures.
The Economy is facing U-shaped or V-shaped recession?
Different scenarios were sketched to see the virus’s impact on Europe’s economy, depending on whether it follows a “V” shape, that is a sharp drop with swift recovery, or a more prolonged “U” in which the rebound takes longer to materialize. 83 million of Germany’s people are under less strict lockdown conditions than France, Italy, the other European nations. Germany still allows non-essential excursions outside. Lufthansa, the airline giant and car behemoth Volkswagen have already slashed their operations. It can be a deeper V, due to halts in production or a longer period of isolation to slow the virus, the spread could bring a 5.4 percent slump, followed by growth of 4.9 percent in 2021. The contact restrictions can last beyond the summer and economic recovery will set in only next year, GDP might fall 4.5 percent in 2020, and another 1 percent can be added year, in the still-more-damaging “U” scenario. For the recovery groundwork in Germany’s highly-interconnected economy, SVR member Achim Trueger urged Berlin to coordinate with governments elsewhere in Europe. Trueger said that the production will not ramp up until the whole world comes out of this crisis. A 1.1 trillion-euro package of economic support from Berlin was welcomed.
How can Germany recover?
To support the recovery and long-term economic development, optimum use should be made of the time during which the public health measures should be made in place. Training and further educating workers to make faster progress on construction projects in areas affected by shutdowns, like schools and public transport. IT can be integrated into daily work. Germany is widely seen as lagging in integrating IT into daily work, so it can make progress by digitalizing the businesses and public administration.