Germany Inc fears the worst as second wave takes hold

Tom Rees
·4-min read
German flag and Euro surrounded by dark clouds
German flag and Euro surrounded by dark clouds

Business confidence in Germany has taken a severe knock as the economic damage caused by a second Covid wave spreads to the “last stronghold” of Europe.

Fears of a double dip downturn in the region’s largest economy mounted after the Ifo Institute’s closely watched monthly business survey slipped for the first time in five months.

Its business climate index dropped back further into downturn territory, falling to 92.7 points from 93.2 in September, as growth expectations sank to their lowest level since June.

Clemens Fuest, Ifo president, warned that "in view of rising infection numbers, German business is becoming increasingly worried" with daily cases doubling in recent weeks.  Growing optimism about the outlook in the crucial manufacturing sector and the services industry "evaporated", the Ifo said.

The darkening economic outlook came as European stocks slid on virus fears and Chancellor Angela Merkel was reported as warning party colleagues that Germany was on the verge of losing control of its second wave.

Europe’s engine room escaped the worst of the economic carnage caused by the first wave, suffering a second quarter GDP hit only half the size as the UK’s. But can Germany avoid such damage again?

New figures out on Friday are expected to show that Germany enjoyed a 7.3pc surge in GDP in the third quarter, reversing much of the 9.7pc hit in the second quarter. Like much of Europe, those figures are likely to be overshadowed by recession worries returning, however.

The region’s “last stronghold” against a second wave is weakening and the Ifo’s influential gauge “definitely marks the end of the rebound”, warns Carsten Brzeski, an economist at ING.

A first glance of recent survey data suggests that Germany has escaped the worst damage again. The purchasing managers’ index (PMI) on Friday was largely unchanged, holding firmly in growth territory as the survey suggested the recovery in the rest of the eurozone had faltered. 

But a look under the bonnet shows that the services and manufacturing industries are moving in very different directions to each other.

“While the weakening of the service sector has continued under new social distancing restrictions, the manufacturing sector continued its upward trend,” explains Brzeski.

The PMIs suggested that the services sector has returned to contraction territory again while the country’s huge manufacturing base was enjoying its strongest output growth in almost 10 years.  He says services are being hurt by “smart lockdowns” targeting the likes of bars and restaurants compared to the widespread restrictions seen in the first wave. 

While Germany’s manufacturers headed into the pandemic on the back foot, thanks to a global industrial slump triggered by Donald Trump’s trade war with China, they are increasingly an area of strength again for the country. 

Smart lockdowns and a bumper rebound in China, a key destination for its exports, could insulate the country’s manufacturing hub over the coming months. 

Jörg Krämer, Commerzbank chief economist, expects Germany to dodge a second recession over the winter, arguing that another “undifferentiated lockdown is unlikely”.

“The government should design its anti-corona measures in such a way that retailers – as the sales channel for the entire German economy – remain open in contrast to the first corona wave,” he explains. Krämer adds that the US provides the European economy with hope for avoiding a second downturn even as cases soar.

“The US economy, for example, continued to grow at a decent rate during the second corona wave in the summer.”

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Other forecasters are far more gloomy on the outlook for Germany as double dip worries haunt the region. The path of the virus and containment measures in the rest of Europe suggest any resilience may be short-lived.

Brzeski warns there is still a “significant risk” Germany’s lockdown could become more severe. While infections are still below the likes of France, Italy and Spain, the daily case rate has doubled in just a week and other countries are quickly reimposing restrictions.

Daniela Ordonez, Oxford Economics economist, also warns the manufacturing rebound “is unlikely to last long if the global health situation does not improve” and investment pulls back again.

She says the robustness of German factories is based on “past backlogs” and some “natural catching-up”, meaning their strength is likely to fade.

“The German recovery is now running out of steam after it stood out as relatively rapid and robust,” Ordonez warns.

Germany has averted the worst of Covid-19’s economic damage thus far but the “last stronghold” in Europe is wobbling.