Germany Braces for Worst Economic Slump in Its Post-War History

Germany Sees Economy Shrinking Up to 7% This Year, Spiegel Says

(Bloomberg) -- Germany expects the fallout from coronavirus to lead to the worst economic contraction since the country began its recovery in the aftermath of World War II.

Gross domestic product is forecast to shrink by 6.3% in 2020, a deeper plunge than even during the financial crisis a decade ago, Handelsblatt reported citing Economy Ministry projections due to be presented next week. The low point of the recession -- the worst since at least 1950 -- is expected in April, before a gradual stabilization, according to the daily newspaper.

Chancellor Angela Merkel’s administration continues to expect a V-shaped recovery with growth in 2021 of more than 5%, Handelsblatt said. The Economy Ministry declined to comment.

Germany Braces for Worst Economic Slump in Its Post-War History

Europe’s largest economy has been crippled by lockdown measures to contain the pandemic, which have shuttered factories, halted travel and closed schools across the continent. Almost every third company in Germany has requested state wage support.

To combat the crisis, Germany has abandoned its balanced-budget policy and mobilized a 1.2 trillion-euro ($1.3 billion) rescue plan to provide businesses with liquidity and aid the battered economy.

Troubling Indicators

After years of surpluses, the public-sector deficit will likely widen to more than 7% of gross domestic product this year due to extra spending to tackle the crisis. Public debt will rise to around 75% of total output, according to the government’s latest fiscal report for the European Union presented this week.

The latest indicators for Germany are troubling. Business confidence extended its slump in April with much of the global economy in lockdown and companies anticipating a prolonged period of subdued demand. The Ifo Institute’s index dropped to a record-low 74.3, well below economists’ median estimate. IHS Markit’s monthly Purchasing Managers’ Index plunged to 17.1 in April, the lowest since the series began 22 years ago.

Reduced spending power from millions of furloughed workers and the persistence of the disease in some of Germany’s largest trading destinations are set to weigh on business for some time to come -- with a gauge for expectations down more than 10 points.

Merkel’s pledge to back a huge EU reconstruction effort helped keep alive the prospects of a deal as member states bicker over how to finance the spending. The bloc’s leaders endorsed a short-term 540 billion-euro package but failed to make much progress on a longer-term rebuilding program.

Early Days

Pressure to act is mounting. European Central Bank President Christine Lagarde told heads of government that the euro-area economy could shrink by as much as 15% this year, and they risk doing too little, too late, according to people familiar with the remarks.

After opening small shops and hardware stores on Monday, Merkel repeated her warning of the risks of second-wave infections, saying the nation is “far from being out of the woods.”

“We are not at the end of the pandemic but at the beginning,” Merkel said Thursday in a speech to the lower house of parliament. “Let’s not gamble away what we’ve achieved and risk a setback.”

©2020 Bloomberg L.P.