German economy shrank by just 5% in 2020 amid Covid-19
Germany’s economy shrank by 5% last year, according to official figures, among the smallest declines anticipated in Europe despite the coronavirus pandemic causing the deepest recession since the 2008 financial crisis.
The German recession is expected to be among the least severe in Europe, with analysts crediting a decisive fiscal response and the avoidance of overly optimistic forecasts. By comparison, national output is expected to drop by more than 9% in Italy and France, and by 11.3% in the UK – the worst performance for more than 300 years.
Analysts said the composition of Germany’s economy helped it record a stronger performance than many close neighbours, its bigger manufacturing and exporting base able to continue operating with fewer disruptions than the service-sector heavy economy of the UK.
Industrial production accounts for more than a quarter of the German economy, compared with about a tenth of the UK economy. In the UK, social consumption – face-to-face spending on goods, services and activities which suffer more from physical-distancing restrictions – is higher than in other major economies, Bank of England figures show.
The German national statistics office said Germany’s gross domestic product (GDP) fell 5% in 2020, compared with the previous year, as the pandemic ended a 10-year growth period with a decline similar to the one caused by the financial crisis in 2008-09. However, the recession caused by Covid was less severe, according to the provisional estimates. German GDP fell by 5.7% in 2009.
Tomas Dvorak, an economist at the consultancy Oxford Economics, said the UK was particularly hard hit during the first wave of the coronavirus crisis. The delayed introduction of lockdown necessitated tougher restrictions that then remained in place for longer than other countries, causing a more severe downturn, he said. UK GDP fell by 19% in the second quarter of 2020 – among the worst performances in the developed world.
Comparing the two countries further, Dvorak said: “Germany has also been more decisive with its fiscal response, even if the overall size of the stimulus wasn’t massive, and they avoided the ‘cliff-edges’ of giving overlyoptimistic deadlines for withdrawal of the furlough scheme.”
Germany’s emergency response to the crisis, offering tax cuts and pumping billions of euros in additional spending into Europe’s largest economy, accounted for about 4.3% of its €3.3tn (£2.9tn) economy, according to Andrew Kenningham, the chief Europe economist at the consultancy Capital Economics. This compares with support worth 12.4% of the UK’s £2.2tn economy. “Of course, Germany has not needed to provide as much support because the economy has not been hit as hard,” he said.
Under the German system of wage subsidies to protect workers’ jobs – similar to the UK furlough scheme – the peak number of people accessing the support was the equivalent of 12.6% of the labour force, compared with 26% in the UK, Kenningham added.
The German statistics office said Germany’s economic growth probably stagnated in the final three months of the year, a period of rising Covid infections when several other big European economies are expected to have fallen into a double-dip recession, including in the UK.
When adjusted for a shorter number of working days in 2020 than a year ago, German GDP fell by 5.3%, as the pandemic brought widespread disruption to the economy with falls in household spending and industrial production.
After eight years of budget surpluses, Germany recorded a budget deficit – the gap between government spending and income from taxes – of €158.2bn, almost 5% of GDP, at the end of 2020, according to provisional estimates. The UK is expected to record a deficit of £394bn, or 19% of GDP, for the financial year ending March 2021.
Rishi Sunak, the UK chancellor, has defended Britain’s economic record, saying the way the Office for National Statistics calculates the contribution of the public sector exaggerates the decline compared with other countries. While economists say this is a factor, they argue it is not sufficient to fully account for the UK’s underperformance.
Kenningham said: “That only accounts for a relatively small amount of the difference between German and UK economic performance last year.
“Non-essential retail was generally open last year in Germany and the construction sector fully open. That in turn reflected the less acute health crisis. There have been a lot fewer deaths, the health system less overwhelmed, and had more capacity, and more successful track and trace.”