German economy to reach pre-pandemic levels by Q4 2021 on industrial pick-up

LONDON (ICIS)–Germany’s economy is on track to recover pre-pandemic levels by the fourth quarter of 2021 as industrial activity is set to bounce back strongly, research institute Ifo said on Tuesday.

Despite experiencing its deepest depression in its post-war history in the first half of 2020, Germany’s containment measures to cap infection rates enabled increased industrial activities, compared with other nations.

The Ifo Business Climate index is almost at pre-crisis levels for many sectors, with significant improvements from the lows reached in April as shutdown restrictions have been relaxed.

GDP in 2020 is expected to fall by 5.2%, year on year, but growth of 5.1% in 2021 would place Germany’s economy at pre-pandemic levels by the fourth quarter.

The recovery would gain pace in 2022, with GDP expected to grow by 1.7%.

Third-quarter GDP is expected to grow by 6.6% after the declines of 2.0% and 9.7% in the first and second quarters, respectively.

This pace is not likely to be sustained in the fourth quarter as restrictions in the services sector are likely to persist until a vaccine to combat the coronavirus becomes widely available, said Ifo.

EXPORTS HELP MANUFACTURING
While the pandemic will impact domestic consumer behaviour, denting economic activity in services, manufacturing could be sustained by exports as other economies mark quicker recoveries.

Germany’s chemicals industry is the largest in Europe. with 2019 sales at €193bn and workforce at around 450,000 people.

Risks of a second wave of infections bringing widespread lockdowns, potential escalations in trade relations between the US and China and the growing possibility of a no-deal Brexit all pose serious threats to Germany’s economy, said Ifo.

Companies still assess the current situation as significantly worse than the beginning of 2020, indicating that there is much still to do to stabilise the economy.

The pandemic has also left deep scars on the labour market, with unemployment spiking to 2.94m people in June, the highest level since the aftermath of the financial crisis.

Pre-pandemic employment levels are expected until 2022 on the back of likely corporate insolvencies the recession is tipped to cause, which is also likely to weigh on output.

AUTOMOTIVE LASTING CHANGES
Ifo highlighted particular concern for the petrochemicals-intensive automotive industry as the economic consequences of structural change could weigh down on the sector.

Germany’s automotive supply chain is a key industrial sector; in 2019, the country produced more than 5m vehicles, the main producer in Europe, according to the industry’s trade group ACEA.

“If the switch in production to alternative powertrains means established domestic value chains within Germany are no longer necessary in their current form, there is a considerable risk of structural distortions,” said Ifo.

“[These] Could have macroeconomic consequences due to the great significance of the automotive industry.”

Front page picture: A car production plant in Sindelfingen, Germany
Source: Philipp Guelland/EPA-EFE/Shutterstock

Click here for the ICIS coronavirus topic page

Click here for the ICIS Brexit topic page

Click here for the ICIS automotive topic page