The German economy started to expand in Q2 2021, with all major indicators now pointing to growth. The economy will rebound strongly and is expected to grow by almost 4% in 2021.
This development is fuelled by the vaccination programme in Germany, which has delivered doses to almost 60% of the population with about 40% now being fully vaccinated. In total, more than 250 million doses have been administered thus far. At the same time, the number of coronavirus cases has decreased, allowing for all major restrictions in Germany to be gradually eased by the end of June 2021. This development had a direct impact on business sentiment in Germany, with companies expressing greater satisfaction with their current business situation: the ifo Business Climate Index (ifo institute 2021) rose from 99.2 points in May to 101.8 points in June. This is its highest value during the coronavirus pandemic.
However, geopolitical risks remain, which may negatively impact the return to pre-crisis economic growth patterns; risks include rising interest rates in the US and the euro area, a resurgence of the pandemic during the autumn, and supply chain disruptions leading to shortages of essential goods and services in Germany, slowing economic activity once again.
After the contraction in GDP of 4.9% in 2020, we expect economic output in Germany to expand by 3.6% year on year in 2021.
That being said, Germany’s GDP decreased by 1.8% in Q1 2021 compared to Q4 2020 owing to a decline in private consumption (-5.4%) following the third nationwide lockdown.
For the full year 2021, however, overall signs point to economic recovery as strong private spending will boost retail and services as well as the travel industry. Private consumption is expected to grow rapidly as households’ savings rates return to their usual patterns as of early May. Meanwhile, the German vaccination campaign is gaining momentum, with around 800,000 jabs being delivered per day. In addition, global recovery will continue to accelerate, especially in the overseas markets that are most important for Germany, namely the US and China – these are expected to expand by up to 7% and 8%, respectively. China already returned to its pre-pandemic production levels by the end of 2020, whereas for the US we foresee a rebound to 2019 levels by the middle of this year. In contrast, Germany’s economic output is expected to be still slightly below the pre-crisis level at the end of 2021.
Compared with the European economy, the German economy fared slightly worse in Q1 2021, as the euro area’s GDP contracted by 0.6% and German GDP by 1.8%. Overall, for 2020, a historic decline of almost 7% was recorded for the European economy. The euro area is not expected to reach 2019 levels of economic output before 2022, with GDP projected to grow by 4.3% in 2021 and 4.4% in 2022, respectively.
The global pandemic had a direct and significant impact on the export-oriented German economy in 2020. Global demand for products manufactured in Germany fell sharply in 2020. For Germany, the coronavirus pandemic in 2020 caused the biggest decline in import and export volumes since the financial crisis in 2009. In total, Germany exported goods worth around 1.2 trillion euros and imported goods worth around 1.0 trillion euros in 2020. Exports fell by 9.3% and imports by 7.1% year on year compared with 2019.
The decline in trade volumes was driven by both reduced demand and the disruption to global supply chains owing to the pandemic as well as geopolitical developments.
This is also partly the result of Brexit, which led to a decline in German exports to the UK. Germany had previously been the UK’s most significant source of imports since records began in 1997, with the exception of six months at the end of 2000 and start of 2001 when the UK imported more from the US. According to the UK’s Office for National Statistics, imports from Germany have been in decline since April 2019, which coincides with Brexit uncertainty. China replaced Germany as the UK’s largest source of imports in spring 2020 for the first time on record, as the spread of Covid-19 raised demand for Chinese textiles used for face masks and PPE.
The recovery of the global economy in 2021, mainly driven by China and the US, is boosting the German export economy. In May 2021 alone, Germany exported goods valued at 109.4 billion euros and imported goods valued at 97.1 billion euros. While exports had nearly returned to pre-coronavirus pandemic levels in May, they exhibited strong growth of 36.4% over May of the previous year; imports rose respectively by 32.6%.
Germany is still considered one of the most international economies in the world. Around 50% of annual GDP is accounted for by exports to other countries, making Germany one of the three largest trading nations in the world. China reclaimed the title of the world's largest exporter in 2020 (2.5 trillion US dollars), followed at a significant distance by the United States with exports of around 1.6 trillion US dollars and Germany with exports worth 1.5 trillion US dollars.
For further information on transatlantic trade flows please visit "Umschwung im Weißen Haus – mehr Berechenbarkeit für transatlantische Handelsströme".
According to the German Federal Employment Agency, around 2.6 million people are currently unemployed in Germany. The unemployment rate fell to 5.7% in June 2021 and is thus already below the pre-crisis level. The unemployment rate is expected to decline further in the course of 2021 as skilled labour shortages continue to weigh heavily on the labour market.
According to research by the German Institute for Employment Research (IAB), those hardest hit by the crisis are mini-jobbers and the self-employed. For 2021, the IAB expects an average decline of 150,000 in the number of self-employed to 3.8 million. This would be the lowest level since the mid-1990s. For people who are employed exclusively in a mini job, researchers expect a decline of 200,000 to 4.6 million people. As a result, it can be assumed that the effects of the coronavirus crisis will be felt most by low-income earners.
That said, unemployment in Germany and other European countries has proven to be moderate by international comparison. This is because employers made extensive use of reduced working hours’ programmes and government subsidies during the coronavirus crisis.
The inflation rate in Germany, measured as the year-on-year change in the consumer price index, equalled 2.3% in June 2021 according to the German Federal Statistical Office. In May 2021, annual inflation was 2.5% and 2% in April, respectively. For the first time in five months, the inflation rate did not rise further. However, there is a growing possibility that interest rates in the euro area will rise again over the next 12 months.
Inflation in Germany is driven by three factors: first, VAT returned to the previous level of 19% as of January 2021 after having been reduced for a period of six months. VAT rates were temporarily lowered last year with the aim of boosting purchasing power. Second, a carbon tax was introduced at the beginning of 2021. An amount of 25 euros per ton of carbon dioxide (CO2) is to be paid for diesel, petrol, heating oil and natural gas emissions. Consequently, heating costs, mineral oil and petrol prices are rising. Finally, following the end of lockdowns around the world, global demand and private consumption are pushing prices further upwards.
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