GERMANY

The German economy contracted by -5.3% in 2020 as the Covid-19 pandemic took its toll. In the final quarter of 2020, German GDP largely stagnated as the “lockdown light” approach pursued between November and mid-December, together with a resilient manufacturing sector – thanks in particular to a tailwind from Chinese export demand – helped contain the adverse impact on the economy. However, with notably tighter Covid-19 restrictions in place since mid-December, things will get worse before they get better in 2021. The economic roller coaster ride will hence continue: Over the course of the year, the German economy will move at a rapid pace through the entire economic cycle palette, from short-term economic gloom in Q1 to a vaccine-driven consumption boom in the second half of the year. We expect the sequencing to unfold as follows:

• Third lockdown and technical resurrection in H1 2021: With Germany moving into its third lockdown just ahead of Easter, its domestic economic resurrection will face another delay until mid-Q2 2021. However, strong extra-EU export demand should once again help Europe’s largest economy weather this renewed setback for private consumption better than its European peers. After all, supercharged, fiscal stimulus-induced US import demand together with resilient appetite from China – German exports to both countries tally up to a combined 15% – should provide further tailwind to already booming industrial production, in turn exacerbating the divergence between buoyant industry and depressed services. In the short-run, supply-chain strains, including long delivery times and input shortages, could weigh on activity but we don’t expect widespread production disruptions to derail the manufacturing upswing. Meanwhile, private consumption is ready for take-off as soon as late-Q2 when sufficient progress on the vaccination front will allow for a gradual easing of Covid-19 restrictions and in turn the unleashing of demand pent up over the winter months.   

• Social spending boom in H2 2021: The easing of Covid-19 restrictions from Q2 onwards and the vaccination of the at-risk population by mid-year will set the stage for the German economy to shift into over-drive, with GDP growth likely to register above +2% q/q in Q3. As uncertainty about the economic outlook recedes, the relatively solid labor market situation - the unemployment rate should come in at 5.8% in 2021 after 5% in 2019 and 6% in 2020 – bodes well for the deployment of precautionary savings. As a result, we expect the savings rate to move towards its pre-pandemic level by year-end. In particular, ‘social spending’ stands to benefit, which will drive the re-convergence between the services and the manufacturing sectors. The sharp acceleration in consumer prices towards 3% y/y in H2 2021, due to the marked pick-up in growth momentum, rising energy prices and strong base effects from the H2 2020 VAT reduction, should prove to be temporary and any calls for monetary policy tightening at that stage would be clearly premature.

Overall, we maintain our GDP growth forecast of +3.4% in 2021 while acknowledging rising downside risks for H1 should the lockdown be tightened further and/or be prolonged, and for H2 should the vaccination rollout fall behind our expectations. In 2022, we expect GDP growth to remain notably above potential at +3.8% as the achievement of herd immunity would allow for a return to economic normalcy while monetary and fiscal policy remain supportive. As a result, the German economy should reach its pre-crisis GDP level in early 2022, whereas other economies in the Eurozone, including Spain and Italy, will need an additional year to heal.