German Economy Posts Minimal Growth in Q4 Due to COVID Second Wave

Published January 31st, 2021 - 10:30 GMT
German Economy Posts Minimal Growth in Q4 Due to COVID Second Wave
For full-year 2020, the Germany economy shrank 5 percent, in line with estimates published earlier this month. (Shutterstock)

The German economy, Europe’s largest, posted just 0.1 percent growth in the fourth quarter last year as new coronavirus restrictions choked off activity, official figures showed on Friday.

 

The Destatis statistics office said a sharp rebound of 8.5 percent in the third quarter “was braked by the restrictions imposed (to curb) a second wave of the virus at the end of the year.”

Compared with the fourth quarter of 2019, the German economy contracted 3.9 percent.

For full-year 2020, the Germany economy shrank 5 percent, in line with estimates published earlier this month.

Meanwhile, the Federal Labor Agency reported a stable unemployment rate for January of 6 percent despite the new measures imposed the previous month to slow the spread of coronavirus.

The country closed restaurants, hotels, culture and leisure centers in November, followed by schools and nonessential shops in December. The measures have since been extended until mid-February.

Analysts said the outlook remained uncertain.

“The resilience shown in the fourth quarter is not going to last,” said Andrew Kenningham, chief economist at Capital Economics.

According to the DIW Institute, German output in the first quarter this year could shrink 3 percent.

But there is some hope that the rollout of vaccination programs will begin to limit the pandemic damage later in the year.

“We could see a clear rebound in the second half of the year if enough people get vaccinated,” said Fritzi Koehler-Geib, chief economist with KFW bank.

Earlier this week, the German government cut its 2021 growth forecast sharply, to 3 percent from 4.4 percent given the persistence of the health crisis which likely means the economy will not return to pre-pandemic levels until mid-2022.

Chancellor Angela Merkel and state leaders agreed last week to extend a lockdown until mid-February as the country, once a role model for fighting the pandemic, struggles with a second wave and record daily numbers of COVID-19 deaths.

France, the eurozone’s second-largest economy, shrank 1.3 percent in the final three months of 2020 after the country entered a second coronavirus lockdown in October to contain a second wave of infections.

Spain achieved timid quarterly growth of 0.4 percent. But that has not stopped Spain from recording its worst-ever annual economic contraction, with output falling 11 percent from 2019’s level, official data showed.

“Numbers for Germany, France and Spain showed that GDP was relatively resilient in Q4,” Nicola Nobile at Oxford Economics wrote in a research note.

But he added, “there are not many indications that this dynamic could have continued in Q1.”

3% German government has slashed its growth forecast to 3 percent this year, a sharp revision from last autumn’s estimate of 4.4 percent.

“All in all, the disappointing vaccine rollout so far, the extension of restrictions in many European countries and the latest data now point to continued weakness in the eurozone over the coming months.”

The French slump, which followed an 18.5 percent rebound in the third quarter after a first lockdown, beat expectations for a 4 percent contraction on average in a Reuters poll of 28 economists, surpassing even the highest estimate of -1.4 percent.

But France is on tenterhooks to find out in the coming days whether the government will put the country under a new lockdown and in particular whether schools will be closed.

The economic outlook across the 19-country eurozone is being muddied by a row between the EU and Anglo-Swedish firm AstraZeneca over its supply of vaccines to the bloc, and by the return of inflation in Germany.

The International Monetary Fund said this week the euro area is likely to slip behind the US in its recovery.

“Recovery paths vary within the group, with the US and Japan projected to regain end-2019 activity levels in the second half of 2021, while in the euro area and the United Kingdom activity is expected to remain below end-2019 levels into 2022,” the IMF said in its in its World Economic Outlook.

The AstraZeneca supply issue is a blow to Europe’s COVID-19 vaccination drive, and the German inflation spike — consumer prices turned positive and rose in January to 1.6 percent on the year — adds to a complex mix of data for the European Central Bank to assess.

ECB data released on Friday showed lending to eurozone companies picked up last month though the bloc was probably back in recession and banks said they were tightening access to credit amid fear of defaults amid a fresh wave of lockdowns.

The ECB is unlikely to cut its already-record-low policy because that would do little to revive the pandemic-hit eurozone economy, five sources told Reuters, playing down concern about a strong euro.

Traders were left scratching their heads this week when Dutch central bank governor Klaas Knot said the ECB “had room” to push its Deposit Facility Rate, currently at minus 0.5 percent, further below zero if needed to stem a rally in the euro.

The sources said Knot had raised the rate cut issue at the ECB’s policy meeting last week but the discussion was “marginal” and not considered part of the ECB’s policy strategy, which is now focussed on bond purchases and cheap loans to banks.

“ECB communication could be such a powerful tool but is really very confusing,” BofA analysts said in a research note.


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