On November 2, Germany will join the ranks of developed countries introducing additional national measures to slow down the spread of Covid19. What will they mean for the German economy and where do the biggest risks lurk going forward?

Lockdown Light

On Wednesday, October 29, the German federal and state governments agreed on new measures to mitigate the spread of the Covid19 pandemic. Faced with ever more regions crossing the threshold of 50 daily cases per 100,000 residents, the Chancellor and the Minister Presidents jointly decided to implement a nation-wide “lockdown light”. It is a significant, yet less severe restriction of public life than in March and April 2020. The most consequential measures for economic activity include:

  • a recommendation to reduce social contacts, office work, and travel to a minimum;
  • the closing down of all restaurants, pubs as well as all leisure facilities, such as swimming pools or fitness centers;
  • the shutdown of wellness or lifestyle services, such as beauty parlors or tattoo studios;
  • the ban of all public events, such as fairs or conferences (professional sports events, most notably Bundesliga matches, will still be allowed behind closed doors);
  • the closing down of cultural institutions, such as theatres or museums;
  • tighter restrictions on the number of customers and additional hygiene standards for retail shops.

Meanwhile, grocery stores, schools, child daycare facilities, and international borders are supposed to remain open. To help cover the cost of those most adversely affected by the restrictions, the government will provide an additional 10 billion euros in financial aid. Companies of up to 50 employees, for instance, will be able to claim a refund of up to 75 percent of their November 2019 earnings. The restrictions have been provisionally limited to the end of the month, with federal and state governments set to evaluate them in mid-November to decide on their extension or withdrawal depending on the public health situation.

The Writing on the Wall

After the European economy had partly recovered from the first corona shock and showed some positive signals this summer, the new restrictions are likely to cause economic setbacks. However, a renewed economic slump is not entirely surprising. The fact that a so-called W-scenario is possible, had been discussed at the beginning of the corona pandemic. Consequently, the OECD calculated the possibility of a “double hit scenario” this summer. For Germany, this “double hit scenario” results in an economic development that resembles an oblique W (see Fig. 1).


Recession Light?

The probable economic slump in the fourth quarter of 2020 outlined in Fig. 1 is likely weaker than the slump in the second quarter. There are two main reasons for this:

  • Business and society have already gained experience with measures to contain the number of infections. Stores, production halls, schools, and other facilities can therefore remain open. Given that the number of coronavirus cases can be limited, a weaker lockdown corresponds to a weaker economic slump.
  • China’s economy has recovered from the corona pandemic (see Fig. 2). On the one hand, this means that – unlike at the beginning of 2020 – inputs from China should now continue to be available. An interruption of supply chains from and to China is therefore not to be expected. On the other hand, China is an important buyer of European products. In the case of Germany, China is the third-largest importer (see Fig. 3). This means that German exporters can continue to sell their products in China.


Three global risks to watch out for

Even if German exporters benefit from China’s economic recovery, they are still heavily dependent on the economic development of Europe and the United States. This may give rise to additional economic risks. Three are particularly noteworthy:

  • A glance at Fig. 3 shows how important countries such as France, the Benelux countries, and Italy are for German exporters. If these countries are in a poor economic situation, German exports also suffer – and with them the people who work in companies whose business model depends on exports. Conversely, there is a high level of cyclical dependence: if the German economy shrinks, neighboring European countries will be able to sell fewer products in Germany.
  • The United Kingdom is also effectively leaving the European single market at the end of 2020. Unfortunately, everything is currently boiling down to a hard Brexit. At least in the first few months of 2021, uncertainty about the future economic relationship between the UK and the EU are likely to weigh on economic recovery across Europe.
  • The economic development in the USA is also a factor of uncertainty. Even if Joe Biden should win this election, he will not take office until January 20, 2021. What measures will the current government take up until this date? Will there be a tightening of protectionist measures, which are mainly directed against China, and will they affect world trade? How will businesses respond to Biden’s plans to increase corporate taxes. These and other uncertainties are unsettling investors and thus curbing economic recovery.


Economic fallout of the pandemic must not further increase inequality

Even if the renewed lockdown means an economic setback, it is unavoidable given the high and rapidly increasing infection figures in Germany. The thesis set up at the beginning of the corona pandemic “The ultimate goal, however, must be to prevent the spread of the coronavirus which is the first step in getting economic life back on track”is still valid.

The main issue now is to ensure a socially balanced distribution of the economic damage that primarily affects parts of the service sector. Restaurants, theaters, cinemas, hotels, the tourism industry, to name but a few, are particularly suffering from the renewed closure of public life. As it is not possible to make up for lost consumption, the German federal government’ extended financial aid package is necessary.