“The coronavirus pandemic and the measures taken to contain it have plunged the German economy into a severe recession,” according to the Bundesbank’s latest Monthly Report. Especially in some consumption-related services, the pandemic is reported to have led to widespread cessation of economic activity starting from mid-March onwards. At present, it is all but impossible to tell with any degree of certainty how large the decline in overall economic activity will eventually be, the Monthly Report states. Ultimately, the severity of the recession will hinge crucially on the timing and scope available for progressively relaxing the containment measures put in place to combat the pandemic, according to the Bundesbank.

Rapid economic recovery unlikely

Instances of an initial, cautious easing of the restrictive measures have already been announced. Until there is a clinical solution, it is likely that the existing restrictions will have to remain in place, state the Bundesbank’s economists. For that reason, a rapid and robust recovery is, if anything, unlikely at present. “Another factor in this context is how quickly consumers’ and businesses’ behaviour returns to normal after the restrictions are relaxed,” according to the Monthly Report.  That will apply not just to Germany itself but also to countries with which Germany has close economic ties.

The Bundesbank’s experts do not expect a self-reinforcing downward spiral for the German economy, however.  Such a scenario will be prevented by Germany’s comprehensive social security system, the Eurosystem’s extensive monetary policy measures, and also the Federal Government's fiscal stimulus measures.

Restrictions hitting German economy hard

“The unparalleled speed with the German economy was paralysed by the pandemic and the adopted containment measures is creating considerable uncertainty in terms of assessing the development of the economy,” write the experts. Many of the common economic indicators are available only up to January or February and therefore do not yet reflect the economic costs of the pandemic or of combating it. At the beginning of the year, the German economy appeared to have initially overcome its protracted sluggishness.

In March, the restrictive measures needed to contain the epidemic had then hit the economy with great force. The official order to close businesses and other protective measures led to a widespread loss of sales in the affected sectors. This is likely to have had a particular impact on restaurants and the catering trade, travel service providers, other leisure and culture-related services, and textile retailers, as well as passenger transportation. “In the second half of March alone, rough estimates reveal that foregone consumption expenditure in this area probably reduced gross domestic product in the first quarter by somewhat more than 1%,” according to the Bundesbank. Moreover, a massive decline in activity was becoming evident across the German economy as a whole.

Explosive growth in short-time work notifications

Labour market data essentially reflect the situation prior to the expansion of measures to contain the pandemic from mid-March onwards. The number of registered unemployed in March did remain stable compared with the previous month, according to the Monthly Report. Nevertheless, the figure had been compiled prior to the imposition of across-the-board contact restrictions, with 2.27 million persons being counted as unemployed, corresponding to an unemployment rate of 5.0%.

In the 1 to 25 March period, however, the Federal Employment Office already examined notifications of short-time working for 1.04 million employees subject to social security contributions. Furthermore, between 1 March and 13 April, 0.7 million firms notifying short-time work had been counted in a special survey. “Although not all notifications necessarily result in actual use, this means that the number of short-time workers is likely to far exceed one million,” the Bundesbank’s economists conclude. Compared with the 2009 economic crisis, short-time work will arguably tend to have a bigger role. This is because there the number of employees subject to social security contributions and potentially entitled to payments is now 6 million higher, and more sectors are affected by the economic downturn, than was the case 11 years ago.

Bottom fell out of oil prices in March

Against the backdrop of travel restrictions and a negative outlook for the global economy along with expansions in production, oil prices plummeted in March. They were down by two-fifths on the month and by more than one-half on the year.

For the first time in roughly a year, March saw a month-on-month fall in consumer price inflation as measured by the Harmonised Index of Consumer Prices (HICP), according to the Bundesbank  This is said to be due, above all, to the marked decline in energy prices. Annual headline HICP inflation went down from 1.7% to 1.3% – core inflation excluding energy and food fell from 1.4% to same figure of 1.3%. The Bundesbank’s economists point out that price developments were still showing hardly any impact from the coronavirus pandemic, as prices had been surveyed largely before the introduction of containment measures. All things considered, the economists anticipate a sharp fall in the rate of inflation, as low crude oil prices will be successively passed through to consumers.