GERMANY

Germany's economy is facing its most severe post-war recession, but it still looks set to emerge from the Covid-19 crisis sooner and in a stronger position than most of its European peers. Following a six-week lockdown aimed at slowing the spread of the virus, during which at times 30% of economic activity was put on pause, the German economy spearheaded the deconfinement trend as an "early-opener". From late April onwards, in line with the gradual easing of containment measures, the German economy started its defrosting process. While in the short-term, some catch-up effects can be expected, the German economy’s underlying growth momentum is likely to remain subdued in the coming months. First of all, social distancing rules as well as some outright bans (for instance on large events) will continue to apply. In addition, even without many restrictions in place, consumers are likely to consume with increased caution due to lingering contagion fears. This reluctance to consume will affect in particular services that require direct customer contact. Moreover, the high level of economic uncertainty, not least driven by widespread job fears - after all, unemployment has risen rapidly and short-time work has been announced for almost a quarter of German workers - is likely to see consumers refrain from making major purchases for the time being. Lastly, the asynchronous economic recovery at a global level and the resulting subdued recovery in global trade is also likely to weigh on prospects for export-dependent early-openers such as Germany. All in all, following a decline of -7.0% in 2020, the German economy looks set to grow by only +4.5% in 2021. A quick return to "business as usual" is clearly not on the table: German GDP will only recover to pre-crisis levels at the turn of 2022/23.

The Covid-19 related economic setback is likely to be much sharper in several southern European countries, in particular Spain (-11%) and Italy (-11.2%). The main reason for this is that other EU heavyweights have been more affected by the virus, which necessitated a stricter and longer lockdown. Moreover, given the greater importance of the services sector - and tourism in particular - for these economies, a return to pre-crisis GDP is likely to take longer, as these sectors look set to see a delayed and less dynamic restart. Last but not least, however, the decisive and comprehensive policy action by the German government has been key in limiting the economic damage. After all, the German crisis response, including higher fiscal spending and extensive public guarantees, adds up to almost 35% of economic output. This explains in part why insolvencies in Germany are likely to rise by only +12% till end-2021, while the growth rate for the Eurozone as a whole is likely to be more than twice as high at +31%.