Global Daily – Germany to return earlier
Euro Macro: Germany’s performance and expectations relative to the eurozone. Germany’s statistics bureau published the final estimate of 2020Q4 GDP as well as its details today. It revised GDP growth in Q4 higher to 0.3% qoq, up from a first estimate of 0.1%. The break down in main spending components shows that private consumption fell by 3.3% qoq in Q4, which was due to the new lockdown measures and the closure of shops and schools as from the middle of December onwards (back then, bars and restaurants had been closed already for six weeks).
Government consumption declined as well in Q4, by 0.5% qoq. Investment in construction was one of few spending components that expanded in Q4 (+1.8% qoq), whereas investment in machinery and equipment declined modestly (-0.1% qoq). Not surprisingly, given the weakness in domestic demand and the ongoing recovery in global trade, net exports contributed positively to GDP growth in Q4, lifting it by 0.6 percentage points qoq.
Compared to pre-pandemic levels (2019Q4) the loss in GDP in 2020Q4 was 3.7%. When looking at the supply side of the economy the biggest loss since the start of the pandemic was registered in ‘other services’ which is the part of services that include entertainment and recreation (-18%). Business services were more than 9% below pre-pandemic levels in 2020Q4, trade, transport, accommodation and food services more than 6% and manufacturing lost 2%. Construction was the only sector that expanded between the start of the pandemic and the end of 2020 (up by more than 5%).
The drop in economic activity had a clear impact on the labour market, with the number of jobs 747,000, or 1.6%, lower in 2020Q4 compared to 2019Q4. This decline in employment was cushioned by the wide use of short-time work schemes. Still the use of short-time work programmes has had a noticeable impact on the total number of hours worked by all persons in employment, which fell by 4.3% over the same period.
Finally on the income side, the compensation of employees was roughly unchanged in 2020Q4 compared to pre-pandemic levels (-0.1%), while property and entrepreneurial income fell by 4.9%. Household disposable income rose by 0.3% yoy in 2020Q4, whereas household consumption expenditure (current prices) dropped by 6.3%. The combination of the two resulted in a rise in the household savings ratio to 17.7% in 2020Q4, up from around 11% in 2019Q4.
Looking forward, we expect GDP to contract in 2021Q1 as the lockdown measures that were introduced during the final months of 2020 have remained largely in place (we have pencilled in around -1.5% qoq, mainly on the back of another drop in private consumption). We have assumed that, on aggregate, lockdowns will not be eased seriously before around the middle of the year. Still, GDP is expected to expand in Q2 on the back of some tweaking in lockdown measures and ongoing growth in industrial output and exports. Subsequently, vaccination programmes should have made enough progress to allow a significant lifting of restrictions around the start of Q3. As a result, GDP is expected to bounce back sharply in the second half of this year. This will mainly be the result of a jump in consumer spending, with the rise in the household savings ratio during the pandemic giving households plenty of room to spend.
We expect Germany’s GDP to return to pre-pandemic levels around the end of this year, which is about two quarters earlier than the eurozone total. This reflects past resilience as well as a somewhat strong pickup during the course of this year. Germany’s industrial strength, less exposure to tourism and aggressive fiscal support last year explain the outperformance compared to the eurozone. On the other hand, next year we expect the German economy to underperform, as other economies benefit more from the recovery of tourism as well as the European Recovery Fund. (Aline Schuiling)