France, Germany dig in for deep slump

Germany and France, the EU’s two largest economies, are bracing for a painful recession as the coronavirus pandemic slashes output to the lowest levels in decades, forecasts said on Wednesday.

GDP in export powerhouse Germany is expected to shrink by nearly 10% in the second quarter as shutdowns aimed at slowing the outbreak paralyse the global economy, the country’s leading research institutes said in a report.

Germany’s second-quarter plunge in GDP should be twice as big as any during the 2008/ 2009 financial crisis and would mark the steepest fall in 50 years since the institutes began taking records in 1970.

“The corona pandemic will trigger a serious recession in Germany,” the six institutes including Ifo, DIW and RWI said, estimating that the economy has already contracted by 1.9% year on year in the first quarter.

France is already in a technical recession, the Bank of France said, after official data showed the economy has shrunk 0.1% in the last quarter of 2019, and current estimates suggest it has contracted about 6% in the first three months of 2020.

A recession is defined as two consecutive quarters of economic contraction.

According to the central bank, France’s first-quarter performance was its worst since the end of World War 2.

The dire forecasts bring down the curtain on years of growth in the EU’s core nations after the exit of Britain, also two of its wealthiest.

“After 10 years of growth we will experience a recession this year,” German economy minister Peter Altmaier said.

He warned that the pace of economic recovery will depend on when the measures to restrict people’s movements “for the protection of lives and health” can be scaled back.

France and Germany have joined nations worldwide in taking drastic steps to stem the spread of the virus, keeping millions of citizens at home, closing schools and shops and shutting down factories.

For every two weeks that the country is locked down by the virus, the Bank of France says it expects the economy to shrink by 1.5%. French economic activity plunged a whopping 32% in the last two weeks of March as the coronavirus crisis intensified, it added.

Bank of France governor Francois Villeroy de Galhau warned that April is expected to be “at least as bad” as late March. “Economic growth will be strongly negative in 2020,” before bouncing back in 2021, he told RTL radio.

Altmaier has said he is bracing for Germany’s economy to contract about 5% in 2020, the biggest drop since 2009. The experts in Tuesday’s report forecast a contraction of 4.2% for Germany over the full year.

But they also sounded a note of optimism, saying Germany with its bulging state coffers is “well positioned” to cope with the economic slump. For 2021, the institutes expect the country to notch up growth of a whopping 5.8%.

Both the governments in France and Germany have promised vast rescue packages to cushion the coronavirus blow for companies and employees, as have other European capitals.

Berlin has unveiled an eyewatering €1.1-trillion aid programme, even suspending a constitutional balanced-budget rule to ramp up its response.

The package includes state guarantees for loans to businesses, easier access to benefits for workers placed on reduced hours, and direct support for the hardest-hit firms.

But even with the unprecedented measures, the six institutes warned that the recession “would leave its mark” on the jobs market.

Germany has long enjoyed record-low unemployment of about 5%, and German workers with their relatively high wages for years have been a key driver of the country’s growth via domestic consumption.

But in 2020 unemployment could climb to 5.9%, the institutes said.

Meanwhile, the number of workers on shorter hours is expected to hit 2.4-million, as giants such as Lufthansa, Volkswagen, BMW and Puma join a slew of companies who have been taking up a German government scheme that tops up the pay of employees affected by measures imposed in the fight against Covid-19.