GERMANY

A record economic rebound looms ahead, but mind the restart challenges

AA1

LOW RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD3806bn (World ranking 4, World Bank 2020)
Population	83.2mn (World ranking 19, World Bank 2020)
Form of state	Federal Republic
Head of government	Olaf Scholz (Chancellor)
Next elections	2025, federal and legislative

Solid public finances
Strong industrial base
Low structural unemployment
Well-diversified export sector (products and trade partners)
Low systemic political risk

Aging population
Skilled-labor shortage
Dependence on exports
Dominance of the automobile sector
Subdued medium-term growth prospects due to weak investment

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Fasten your seatbelts for an unprecedented consumption boom in H2 2021

The German economy contracted by close to -5% in 2020 as the Covid-19 pandemic took its toll. In 2021, after a rather disappointing economic start, with GDP contracting by close to -2%q/q in Q1, the economic prospects for Germany are now very promising. In view of the recent decline in new infections and good progress on the vaccination front, the service sector is likely to have already started to catch up in May, accompanied by the first easing of Covid-19 restrictions. In the coming months, one positive economic record after the next can be expected, in contrast to last year's plunge into the abyss. We expect an unprecedented consumption rebound to materialize, fueled by pent-up demand in a context of sharply declining economic uncertainty. Meanwhile the ongoing industrial upswing – despite lingering rebound bottlenecks in the form of component shortages that should hold back production momentum - should fuel a capex boom. Overall, GDP growth should come in at +3.4% in 2021 and +3.8% in 2022. As a result, the German economy will already return to pre-crisis GDP levels in winter 2021. However, one should be prepared for some economic restart difficulties. The abrupt reopening of the economy is likely to lead to acute labor shortages, especially in sectors that have been stuck in Covid-19-induced hibernation for months including accommodation and food services. The imbalance between rapidly rising labor demand and impaired supply – Covid-19 has weighed on immigration flows and vocational training programs and, in view of poor prospects in some sectors, led to a reorientation of workers to sectors with brighter prospects - can be reduced by training offensives and at least temporarily higher wages.

Labor market – Kurzarbeit is saving the day, for now

The Covid-19 related economic outfall led to an unprecedented labor market shock. In Q2 2020 alone, unemployment rose by more than 600,000 to the highest level since 2013. However, Kurzarbeit helped avert an even stronger jump in job losses, putting more than 20% of jobs on life support in H1 2020. Given the notable rebound momentum, the German labor market should also embark on a firm recovery trend. By the end of 2021, almost one in two people who lost their jobs in the wake of the Covid-19 crisis should find new employment. The unemployment rate will however remain elevated at 5.8% in 2021 after 6% in 2020. We don’t think the labor market is fully out of the woods yet, with further job losses to be expected once support schemes are scaled back and structural headwinds are felt. In this context, combining active labor market policies (up-skilling, intermediation) with wage subsidies is both urgent and important. Complementary schemes to subsidize new hires (especially younger job-seekers at risk of a scarring effect in their school-to-job transition, employees choosing mobility and re-skilling and those starting their own business) should also be pursued to lessen the risk of postponed unemployment.

Public finances not immune to Covid-19

In 2019, Germany’s debt-to-GDP ratio fell below the 60% Maastricht criteria for the first time in 18 years after registering at around 80% of GDP as recently as 2012. However, Covid-19 has put an end to the continuous downward trend in government debt that had been driven by buoyant economic growth, declining debt servicing costs and a relatively moderate expansion in government spending. Fiscal rescue measures coupled with the sharp setback in economic growth will keep the public deficit clearly above the 3% mark in both 2021 and 2022. As a result, government debt in relation to GDP looks set to stsbilize around 70% until 2022 before embarking on a gradual downward trend. - June 2021

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
United States 8.6%	1	11.4% China
China 8.0%	2	7.7% Netherlands
France 7.5%	3	6.7% United States of America
Netherlands 6.4%	4	5.7% Poland
United Kingdom 5.5%	5	5.5% France

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Road vehicles 14.7%	1	10.0% Road vehicles
Electrical machinery, apparatus and appliances, n.e.s. 8.6%	2	8.3% Electrical machinery, apparatus and appliances, n.e.s.
Other industrial machinery and parts 7.5%	3	5.7% Medicinal and pharmaceutical products
Medicinal and pharmaceutical products 7.2%	4	4.2% Other industrial machinery and parts
Specialised machinery 4.3%	5	3.9% Office machines and automatic data processing machines

The payment behavior of domestic firms is good and the courts are efficient in delivering timely decisions however, professional pre-legal negotiation efforts remain the most efficient means of collecting debt.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

The purpose of insolvency proceedings in Germany has long been to realize the debtor's assets to repay the creditor's debt. As a result, liquidation has in practice remained the default procedure and the system provides no genuine support to unsecured creditors when it comes to collecting debt from insolvent debtors.