Amid a brutal contraction, corporate Germany assesses the damage

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August 2, 2020

But business leaders think the worst may be over

IT WAS EVEN worse than expected. On July 30th Destatis, Germany’s federal statistics agency, announced that the economy shrank by 10.1% in the second quarter, compared with the first—largely the result of the government’s measures to contain the spread of covid-19. The drop was the deepest in half a century. Destatis also reported associated slumps in exports and imports, household consumption and investment in machinery and equipment.

The plunge in output returned GDP to where it was ten years ago. Even so, according to Florian Hense, an economist at Berenberg, a German private bank, it “could have been much worse”. Germany’s lockdown was softer and shorter than in other European countries. Moreover the government responded with one of the most comprehensive fiscal stimuli around the globe, writes Mr Hense, which further cushioned the blow to the economy and accelerated its recovery. On the day after the grim German announcement France, Italy and Spain reported even sharper contractions, of 13.8%, 12.4 % and 18.5% respectively.

Nearly all businesses are feeling the pinch. The second-quarter reporting season, now halfway through, has been miserable. HeidelbergCement, a maker of concrete, made a loss of €3bn ($3.5bn) in the first half of 2020, compared with a profit of €290m a year earlier. Volkswagen (VW), Europe’s biggest carmaker, lost €1.4bn, against a profit of €9.6bn, and said car sales had dropped by 27% to 3.9m vehicles. And BASF, the world’s biggest chemicals company, said that sales slumped by 12%, year on year, in the second quarter, chiefly because demand from the car industry had collapsed. It too reported a net loss of €878m, having raked in almost €6bn in the same quarter in 2019. This week Lufthansa, the national airline, Siemens, a giant engineering company, and others report, most likely intensifying the gloom.

Business leaders are pinning their hopes on an economic recovery in the third quarter, assuming that a resurgence of coronavirus infections will not lead to another lockdown of the economy. The government’s stimulus of more than €130bn—equivalent to 3.8% of last year’s GDP—including a temporary cut of value-added tax to boost domestic demand, should help the economy return to growth. The European Union’s €750bn package (to which Germany will be a big contributor) should help further by boosting German exports within the bloc. Peter Altmaier, the economy minister, thinks the economy will start to grow again in October “at the latest”. He expects it to shrink by 6.3% this year but to grow by 5.2% next year. Still, it will not reattain its pre-crisis level until 2022 at the earliest.

One ray of light is unemployment, which held steady at 6.4% in July, with 18,000 fewer people out of work than in June. For that, credit the country’s Kurzarbeit, short-time work schemes that help companies keep staff employed at reduced (or even no) hours while the state pays the bulk of salaries. About 6.7m workers are enrolled. Before the pandemic unemployment was at a record post-reunification low, hovering at 5%. Skilled workers in particular were scarce.

Retail sales have been recovering, jumping by 12.7% in May after most shops were closed in March and April. Industrial production rose around 10.4% in the same month, according to Destatis. German business leaders are cautiously optimistic that the worst is behind them. Ola Källenius, the chairman of Daimler, another big carmaker, said recently that he had spotted the first signs of a recovery of sales. VW thinks that in spite of its disastrous second quarter it will be profitable this year.

On July 21st HSBC, an international bank, published a survey of 2,600 firms with sales of more than $5bn in 14 countries. It suggested that the 200 German firms included should weather the crisis better than those elsewhere: 53% of them said they were strongly affected by the pandemic, compared with 72% in the other 13 countries (including America, Britain, Canada, China, France and Mexico). Maybe. Most German businesses are extremely dependent on exports. Their fate will depend on the recovery of economies—and the taming of the virus—in the rest of the world.

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Amid a brutal contraction, corporate Germany assesses the damage

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