“German economic output is likely to have declined considerably more sharply in the second quarter of 2020 as a result of the coronavirus pandemic than in the first quarter,” the Bundesbank explains in the latest edition of its Monthly Report. “This looks set to be the sharpest decline in real gross domestic product (GDP) since the beginning of the quarterly time series published by the Federal Statistical Office for the period from 1970 onwards,” the report notes.

“However, economic activity is likely to have already bottomed out in April,” write the Bundesbank’s economists. This is suggested by both the conventional economic indicators which are already available, as well as by timely, high-frequency indicators. The latter were also reflected in the performance of the Bundesbank’s new weekly activity index (WAI). Nine high-frequency indicators that are available with short lead times and two other “conventional” indicators feed into the WAI. In the current situation, the WAI provides timely information on how the coronavirus pandemic is impacting economic activity in Germany. According to the Monthly Report, the index has risen significantly in recent weeks, but was still distinctly negative in mid-July. The Bundesbank expects the economy to continue to recover in the second half of the year. The recently adopted economic stimulus package will probably also contribute to this.

Industry bottoms out in May

As stated in the Monthly Report, there have been differences in how well the different sectors of the German economy have recovered. The Bundesbank notes that, while retail trade probably benefited from catch-up and substitution effects which allowed it to record quite substantial sales growth in May, manufacturing firms still assessed their current business situation as very poor in June, too. According to the Monthly Report, industrial output and exports of goods underwent only a muted recovery in May. Even though industry had bottomed out, it recouped just one-quarter of its previous losses from March and April. The situation in the hard-hit automotive industry was found to weigh particularly heavily on the overall result. At the lowest point of the crisis, car manufacturers had to virtually completely stop production before resuming activity in May, the Bundesbank’s economists report.

According to the Bundesbank, exports of goods rose considerably in May by a seasonally adjusted 9% on the month, although on an average of April and May, they were just over one-quarter below the average of the first three months of the year in nominal and price-adjusted terms. “Against the backdrop of the global coronavirus pandemic, this slump was very broadly based,” the Bundesbank’s economists write, noting that only business with China bucked this trend, contracting only marginally. The Bundesbank attributes this to the fact that the Chinese economy had emerged from the trough of the pandemic-induced recession earlier than other trading partners.

Unemployment rises markedly despite short-time work

According to the Monthly Report, the number of employees subject to social security contributions who were affected by short-time working schemes recently hit an all-time high; in April, the figure stood at 6.8 million. “This is equivalent to one in five employees subject to social security contributions being in short-time work,” write the Bundesbank’s experts. All the same, employment recently fell very significantly and unemployment rose markedly, with the Monthly Report noting that, in May, employment figures fell by 314,000, or 0.7%, on the month in seasonally adjusted terms. According to the Bundesbank’s economists, all sectors were affected, with the exception of public administration, banking and insurance services and agriculture. The number of unemployed persons stood at 2.94 million, or 6.4%, in seasonally adjusted terms in June. The number of persons officially registered as unemployed thus rose less sharply than in the previous months. According to the Bundesbank, recruitment indicators also recovered from record lows.

Energy drives rise in consumer prices

According to the Monthly Report, after declining since March, consumer prices as measured by the Harmonised Index of Consumer Prices (HICP) rose again significantly in seasonally adjusted terms in June. The Bundesbank’s experts attribute this to the renewed rise in energy prices in particular. Annual headline HICP inflation rose overall from 0.5% to 0.8%; excluding energy and food, it would have stood at 1.1% again. Owing to the temporary lowering of value added tax in the second half of 2020, the experts expect negative inflation rates from July onwards. “Nevertheless, when the cut in VAT rates is rescinded in January 2021, the rates should become clearly positive again.”