Quarterly Report Germany I/2020

QI-2020 QUARTERLY REPORT GERMANY

Economy could stagnate in 2020 Coronavirus weighs on exports and investment in plant and equipment

▪

Falling exports and declining investment in plant and equipment are slowing down economic growth. The minimal year-on-year growth of one-half percent is only the result of a statistical effect. Economic output is expected to stagnate this year following price and calendar adjustment.

▪

The federal government should boost confidence among the business community and citizens with a package of short-term measures for affected industries and medium-term reforms in investment and tax that stimulate growth.

▪

German industry is heading for its longest recession since Reunification. Industrial production fell for the sixth successive quarter in the fourth quarter 2019, this time by 5.7 percent year on year.

▪

The mix of weak economic growth, increased global uncertainty and idle production capacities is stifling investment. We expect investment in plant and equipment to drop by three percent.

▪

Domestic factors are currently still sustaining the economy. The stable labour market continues to bolster private purchasing power.

The construction industry remains buoyant thanks to the high demand for residential housing and infrastructure. Investment in buildings is set to increase by 2.5 percent.

Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Content The German economy ......................................................................................................................... 3 German economy to tread water until the end of the year .................................................................... 3 Labour market: industrial recession having first effects ........................................................................ 5 Drop in incoming orders for German industry at the end of the year .................................................... 6 Industrial production: no sign yet of an end to the industrial recession ................................................ 8 Capacity utilisation falling steadily ....................................................................................................... 10 Upturn in industry unlikely in 2020 ...................................................................................................... 10 Outlook ............................................................................................................................................... 11 Economic policy tasks ......................................................................................................................... 15 Sources .............................................................................................................................................. 16 Imprint ................................................................................................................................................ 16 Basic data for national accounts ..................................................................................................... 17

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

The German economy German economy to tread water until the end of the year The German economy is failing to gather momentum. According to figures from the Federal Statistical Office, Germany’s gross domestic product stagnated in the fourth quarter 2019 compared to the previous quarter following price, calendar and seasonal adjustment. The result for the third quarter was upwardly revised to an increase of 0.2 percent. The growth rates of the first six months of the year were confirmed. Year on year, real growth was 0.6 percent in the third quarter and 0.4 percent in the fourth quarter. Despite the unexpectedly weak performance of the fourth quarter, the annual result for German GDP growth remains at the plus 0.6 percent published by the Federal Statistical Office in January. In the fourth quarter 2019, the economic output was generated by a workforce of 45.5 million.

That is 300,000 people or 0.7 percent more than one year ago.

Growth in real GDP in percent 4

3

2.5 2.2

2

1.5 0.6

1

0

-1 I

II

III

IV

I

2016

change over previous year quarter

II

III 2017

IV

I

II

III 2018

change over previous quarter

IV

I

II

III

IV

2019

change over previous year

Source: Federal Statistical Office

On the output side of GDP, price-adjusted gross value added increased by a total of 0.2 percent across all sectors of the economy in the fourth quarter compared to the same period last year. Economic growth of more than two percent was seen in the information and communication sector, the financial and insurance sector, and in retail, transport and hospitality. The construction industry’s result of two percent growth in the final quarter was well below the annual average increase of 3.9 percent. The factors playing into the equation here were the considerable decrease in construction activity in the finishing sector and the quarter’s large number of bridging days. Gross value added also increased by a considerable 1.7 percent among the public service providers as well as the education and healthcare sector. In absolute terms, this sector also had the biggest increase in employees, going up 214,000.

The increase in value added by the service sector was almost completely cancelled out by the

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

economic crisis in manufacturing. Industrial gross value added dropped by a hefty 4.8 percent, the fifth consecutive quarter of negative growth. This was accompanied by the first shrinkage of the industrial workforce since 2010 (down 18,000 employees).

On the expenditure side of GDP, growth impetus came exclusively from the domestic front. At 1.2 percent in real terms, the consumption expenditure of private households in the fourth quarter rose only half as much year on year as in the third quarter. Private household expenditure on transport and communication services (up 3.4 percent), furniture and household goods (up 2.6 percent) and hotels and restaurants (up 1.9 percent) all recorded above-average growth. Spending on food, beverages and tobacco, on accommodation, and on energy and water supply hardly increased at all in real terms. State consumption expenditure once again increased robustly, going up by three percent and contributing 0.6 percentage points to the overall growth in consumption expenditure of 1.3 percentage points.

Gross fixed capital formation only went up 0.7 percent in the fourth quarter. While investment increased substantially in buildings (up 2.7 percent) and in other assets (including software and patents), which rose by 2.6 percent, investment in plant and equipment dropped by a considerable 2.6 percent. There were also extensive changes in inventories resulting in a negative contribution to growth of 1.1 percentage points. All in all, domestic expenditure only contributed 0.4 percentage points to growth. Exports increased 0.9 percent compared to the previous year following price adjustment.

In the same period, imports increased slightly more, going up by 1.2 percent, so foreign trade ultimately cut GDP growth by 0.1 percentage points.

Foreign trade practically stagnates in fourth quarter In the fourth quarter 2019 exports of goods and services increased by 0.5 percent compared to the same period last year (country-specific seasonally adjusted data not available). The overall result for the year was only marginally better with an increase of 0.8 percent. Exports to third countries strikingly bucked the trend by rising substantially. In absolute terms, exports to Turkey increased by 1.34 billion euros which is an increase of more than one third. One should bear in mind, however, that there was a clear slump in exports to this country the previous year. Exports to China in the fourth quarter increased by 1.21 billion euros or 5.1 percent, exports to the United States by 2.5 percent or 706 million euros. Exports of goods and services to the EU states outside of the euro area also rose considerably, with exports to Poland increasing by 3.2 percent or 521 million euros and to the Czech Republic by 5.3 percent or 589 million euros. Within the euro area, there were only slight hikes in exports to Belgium, up 429 million euros, and to France, up 273 million euros. Exports to the United Kingdom plunged by 1.33 billion euros or 6.8 percent and to Italy by 1.16 billion euros or 6.4 percent, with exports to Austria and the Netherlands also dropping by around 500 million euros each.

In the fourth quarter 2019, German imports dropped marginally compared to the same period the previous year, going down by 0.2 percent. The steepest drop in absolute terms was in imports from Russia (down 1.63 billion euros or 17.1 percent), followed by imports from the Netherlands (down 1.28 billion euros or 11.5 percent) and from Belgium (down 1.05 billion euros or 4.2 percent).

Imports to the United States, on the other hand, rose strongly, going up by 2.37 billion euros or 14.6 percent. Imports from Ireland shot up by 1.33 billion euros or 39.7 percent, and from the United Kingdom by 930 million euros or ten percent. Transatlantic trade flourished across the board towards the end of the year with imports from Mexico (up 468 million euros) and Canada (up 329 million euros) also rising by more than 25 percent each.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

German exports and imports in Q4 2018 in selected countries Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in imports in %

in million euros

Turkey

5 304

+ 1 337

+

33.7

China

25 142

+ 1 209

+

5.1

Ireland

USA

29 403

+

706

+

2.5

Great Britain

Switzerland

14 126

+

629

+

4.7

Czech Republic

11 784

+

589

+

Poland

16 813

+

521

Belgium

11 331

+

1 818 26 242

Saudi Arabia France

USA

in %

18 656

+ 2 372

+ 14.6

4 675

+ 1 330

+ 39.7

10 262

+

930

+ 10.0

Mexico

2 241

+

468

+ 26.4

5.3

Poland

14 817

+

366

+

+

3.2

Canada

1 598

+

329

+ 25.9

429

+

3.9

Hungary

7 103

+

308

+

4.5

+

276

+

17.9

+

273

+

1.0

Sweden

3 769

-

309

-

7.6

Austria

10 465

-

340

-

3.1

Italy

14 022

-

470

-

3.2

2 778

-

489

-

15.0

2.5

Vietnam

1 313

-

283

-

17.7

Japan

4 838

-

292

-

5.7

Norway

Netherlands

22 441

-

512

-

2.2

Czech Republic

11 780

-

526

-

4.3

Austria

15 898

-

570

-

3.5

Netherlands

24 184

- 1 053

-

4.2

Italy

16 837

- 1 160

-

6.4

Belgium

9 885

- 1 280

-

11.5

Great Britain

18 437

- 1 339

-

6.8

Russia

7 893

- 1 630

-

17.1

330 909

+ 1 583

+

0.5

Total

-

-

0.2

Total

275 830

578

Sources: Federal Statistical Office, own calculations

Labour market: industrial recession having first effects According to preliminary data from the German Federal Statistical Office, the number of people in employment in January 2020 increased to 45.08 million. This corresponds to 224,000 more people in work, or 0.5 percent more, than one year ago. The number of people in jobs subject to social security contributions also continued its upward trend. According to the projections of the German Federal Employment Agency for December 2019 (latest available figures), the number of people in such employment was 33.76 million. That is 466,100 people or 1.4 percent more than one year ago.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Employment in most sectors increased year on year. The strongest job growth in absolute terms in December was seen in healthcare. The workforce here increased by 78,000 or 3.1 percent. The steepest rise in relative terms was in the information and communications sector (up 5.1 percent or 57,000). Over one half of the increase in jobs subject to social security contributions was borne by foreign employees, particularly from eastern European countries and non-European countries of origin.

The recession in industry is beginning to have an impact on jobs subject to social security contributions.

Jobs were down in the metal and electrical and electronics industry (down 8,000 or 0.2 percent) and in producers of intermediates (down 6,000 or 0.5 percent). The workforce of financial and insurance services providers decreased by 7,000 or 0.8 percent. Jobs in the temporary employment agency work plummeted by 73,000 jobs or 10.2 percent.

German labour market* 34

4 Unemployed persons (right axis)

33

3 32 31

2

30

Employed persons covered by social security (left axis) 1

29 2

28 2012

2013

2014

2015

2016

2017

2018

2019

0

2020

Difference in the number of workers making social security contributions from the same month last year (right axis)

*seasonally adjusted in million Source: Federal Employment Agency

Other forms of employment decreased compared to one year ago. The number of self-employed including contributing family members went down by 96,000 or 2.3 percent to 4.11 million in the fourth quarter of 2019. The number of people exclusively in marginal employment also dropped, going down by 126,000 or 2.7 percent to 4.51 million in December 2019 according to preliminary figures from the Federal Employment Agency. In February the Federal Employment Agency (BA) registered 2.40 million unemployed individuals. This corresponds to a decrease year on year of 23,700 or one percent. The unemployment rate as calculated by the Federal Employment Agency was at five percent, or 3.2 percent according to the ILO definition.

Drop in incoming orders for German industry at the end of the year In December 2019, incoming orders for industry were 2.1 percent lower than the previous quarter after price, seasonal and calendar adjustment, according to preliminary data. If large orders are not taken into account, incoming orders for manufacturing would have been down 1.3 percent. While domestic orders increased for the second time in a row compared to the previous month, this time by 1.4 percent, foreign orders were down by a significant 4.9 percent. Countries outside the euro area ordered 2.1 percent more but demand from within the euro area plunged by 13.9 percent.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

New orders, manufacturing 114

10

112

8

110

6

108

4

106 2 104 0 102 -2

100

-1.2 -0.8

98 -4.3

-0.6

-4 -6

96 94

-8 2016

2017

2018

2019

Change over previous year, two-month-average, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

The December figures round off the result for the fourth quarter 2019, which shows yet another decrease in incoming orders compared to the previous quarter. This trend has now continued for four successive quarters. The decrease, at minus 0.6 percent, was more moderate than in the first half of the year, which indicates that the situation may gradually be bottoming out. Domestic demand was down 1.3 percent. The robust increase in orders from within the euro area of 4.9 percent was accompanied by considerably weaker demand from countries outside the euro area (down 3.7 percent), meaning that overall, foreign demand stagnated.

Among the main groups of industrial goods, producers of intermediate goods recorded an increase in orders in the fourth quarter 2019 compared to the previous quarter for the first time in one and a half years (up 0.7 percent). Domestic demand only dropped marginally compared to the third quarter, going down 0.3 percent, while orders from abroad picked up 1.8 percent.

Demand for capital goods dropped quarter on quarter for the fourth time in a row, going down 1.5 percent in the fourth quarter. Domestic demand dropped 2.7 percent, much more than demand from abroad, which only fell 0.9 percent. Apart from an upward tick in the fourth quarter 2018, demand for capital goods has been falling steadily for two years now.

Consumption goods producers received 0.9 percent more orders in the fourth quarter than in the third quarter 2019. Orders were also up year on year (by one percent). The increase in orders compared to the previous quarter resulted from an increase in domestic demand of 2.6 percent paired with a slight drop in foreign demand.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Industry’s slump in orders is definitively not over yet. The positive signs early on in the fourth quarter did not mark the start of a turnaround. Orders for industry have now been declining for six consecutive quarters. In 2019 overall the volume of orders for industry decreased by six percent. That is the biggest decline since the crisis year 2009. The drop in foreign orders, at minus 5.8 percent, was less pronounced than the drop in domestic orders, which plunged 6.4 percent. Domestic orders have now fallen year on year for the second time running.

Industrial production: no sign yet of an end to the industrial recession In December 2019 output in the production sector was down by 3.5 percent on the previous month according to preliminary data and following price, calendar and seasonal adjustment. Output has not dropped so strongly month on month since the financial crisis in 08 and 2009. Production was extremely weak in almost all sectors. Construction recorded a plunge in activity of 8.7 percent overall.

The drop in the finishing trades reached double digits, with mainstream construction decreasing at a somewhat more moderate pace of 2.8 percent. Energy production, on the other hand, increased by two percent in December. Industry recorded drops in production of 2.9 percent. Among the main industrial groups, capital goods producers curbed output by 3.5 percent in December. The production of consumption and intermediate goods was down by two percent and 2.6 percent respectively.

Production development in the manufacturing industry year on year change in percent 2018 2019 2019 year Q2 Q3 Q4 original value calendar adjusted

compared to previous period in percent 2019 Q2 Q3 Q4 Oct Nov Dec seasonally and calendar adjusted

Production

0.9

-3.7

-4.0

-4.0

-4.6

-1.7

-0.9

-1.9

-1.2

1.2

-3.5

Industry

1.1

-4.7

-5.1

-4.7

-5.7

-1.9

-0.9

-2.3

-1.4

1.0

-2.9

Intermediat goods

0.6

-4.0

-4.5

-4.9

-4.8

-2.7

-1.5

-0.8

0.8

-0.4

-2.6

Capital goods

0.9

-5.1

-5.1

-3.3

-7.6

-1.3

-0.5

-4.4

-4.2

2.4

-3.5

Consumer goods

2.9

-5.0

-6.1

-7.9

-1.9

-1.0

-0.9

0.1

1.2

0.4

-2.0

Energy

-1.5

-6.8

-8.0

-12.0

-4.1

-5.7

-3.1

4.4

3.0

1.5

2.0

Construction industry

0.2

2.9

3.1

3.1

0.8

0.5

0.1

-1.9

-1.5

2.4

-8.7

Construction industry proper

7.7

5.8

4.8

4.5

4.7

0.7

0.1

0.3

-1.3

2.1

-2.8

Finishing indusrty

-5.5

0.4

1.5

1.7

-2.1

0.3

0.2

-4.0

-1.7

2.6

-14.0

Sources: Federal Statistical Office, own calculations

The (still preliminary) December figures for production round off the results for the year 2019. These suggest that activity in the production sector was down 3.7 percent compared to the previous year.

Energy production recorded a particularly large decrease (down 6.8 percent). Construction is still going strong, with an increase of 2.9 percent overall. Mainstream construction expanded particularly

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

strongly, going up 5.8 percent. Output in the finishing trades only increased by a very moderate 0.4 percent. Output in manufacturing dropped by 4.7 percent in 2019 compared to the previous year.

Even if the December figures are upwardly revised due to the high number of bridging days and some late reporting this will do little to change the annual result. Output will be down by a good four percent even if industrial production in December 2019 matched the growth of one year previously.

Production was down among all main industrial groups. Manufacturers of intermediate goods saw a somewhat weaker decline in production at four percent than manufacturers of consumption goods, where output decreased five percent, and intermediate goods, which dropped 5.1 percent. Among the individual industries, vehicle production suffered a double digit drop of minus 11.7 percent, making it the main factor pulling down industrial growth, as in 2018. Other sectors with double digit drops were tobacco processing (down 13.6 percent) and pharmaceuticals (down 16.4 percent). While the effect of tobacco processing on the overall figure is hardly noticeable, the decline in pharmaceuticals accounted for as much as 0.5 percentage points of the overall result. However, this drop is largely due to a oneoff increase in pharmaceuticals production the previous year.

Production, manufacturing 110

8

108

6

106

4

104

2

102

0

100

-2

-1.5 -2.3

-1.8

98

-4 -2.7

96

-6 2016

2017

2018

2019

Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

Caught in the downward momentum of the automotive sector, automotive component suppliers also saw production dwindle. Producers of electrical equipment recorded a drop of 9.1 percent. Producers and processors of fabricated metal products curbed their output by between 3.7 and 5.9 percent.

Production in machinery manufacturing went down by 3.6 percent. Only a few sectors managed to increase production. Producers of clothing and of food and fodder only just topped their output of the previous year. The repair and maintenance of machinery and equipment expanded by two percent.

The production of data processing devices and electronical and optical products increased by 1.4 percent. The production of other transport equipment, which has been growing for nine years now,

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

recorded another good result, growing by 6.6 percent. The production of railway vehicles surged by 7.3 percent, of aircraft and spacecraft by 7.1 percent and shipbuilding by five percent.

Capacity utilisation falling steadily The steep drop in industrial production last year also led to a substantial decrease in capacity utilisation. According to data from the ifo Institute, the utilisation rate in manufacturing fell within a year by 4.4 percentage points to 82.6 percent until the end of 2019, thus dropping below the long-term average of 83.7 percent for the first time since 2013. In the first quarter 2020, capacity utilisation increased by one half of a percentage point but, at 83.1 percent, remains below the euro crisis levels of 2012 and 2013. Excluding the food industry and tobacco processing, capacity utilisation in industry is even lower at 83 percent.

With an average of 3.1 production months, orders in hand for industry as a whole are surprisingly still higher than the long-term average of 2.8 months. Year on year, the order backlog only dropped slightly.

Among the main industrial groups, the producers of intermediate goods need an average of 2.6 months to work off their orders. Consumer goods producers had an order backlog of 1.9 production months on their books, and producers of capital goods 3.9 months. While the backlog of orders for capital goods producers was still over the ten-year average, the backlog for intermediates and consumer goods was below this average.

Upturn in industry unlikely in 2020 As in 2019, manufacturing across all industrial main groups started out the new year with a negative statistical overhang. Should production stagnate at the fourth quarter level, the annual drop in production will be 2.5 percent. The negative statistical overhang is highest for capital goods producers at 3.9 percent, and two percent for the producers of intermediate goods. Consumer goods producers started out 2020 with a negative statistical overhang of 0.7 percent due to the stabilisation that occurred in the fourth quarter 2019. Industrial activity is set to remain in recession in the current year which will make it the longest since Reunification. At the end of 2019 industrial production dropped for the sixth quarter in a row (production index year on year). There are no signs of a recovery yet. The four-quarter downward trend in incoming orders had even accelerated at last count, so there are no signs of bottoming out either. The manufacturing purchasing managers’ index has recovered somewhat from its trough in September 2019 but is still well below the threshold of 50 index points to expansionary territory.

Ifo business climate: coronavirus not yet factored in Sentiment in the German economy brightened somewhat in February. The ifo business sentiment index nudged up by 0.1 percentage points following a decrease of 0.4 points in January. The surveyed companies rate current business as worse than in January. However, expectations for the next six months have improved somewhat, which is surprising given the increased uncertainty fuelled by the spread of the coronavirus. Among the individual sectors, sentiment among service providers has deteriorated. They are slightly less satisfied with current business and also more sceptical about the future. The business climate has also clouded over somewhat in wholesale and retail. The recent positive trend in current business and prospects was short-lived. The index for retail increased slightly on the back of improved business prospects. The index for mainstream construction dropped once again, triggered by more pessimistic prospects.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Business expectations for the next six month

ifo Business-Cycle Clock German manufacturing* Upswing

25

Boom Jan 2014

Jan 2011

Jan 2018

15 Jan 2010 5 Jan 2016 February 2020

-5

Jan 2017 Jan 2012 Jan 2015

Jan 2013

Jan 2020

-15 Reccession

Downswing

-25 -30

-20

-10

* Balances seasonally adjusted

0

10

20

30

40

50

60

Assesment of current business situation

Source: ifo Institut

Construction companies, on the other hand, rate their current business somewhat more positively. The business climate index for manufacturing increased for the third consecutive time. While companies in this sector rated their current business as somewhat poorer again, their expectations for the next six months have improved, for the fifth time in a row. Export prospects declined in February. They dropped for the second successive month and the majority of companies surveyed were pessimistic.

Outlook At present, the biggest negative factor for economic growth in Germany is not Brexit, nor Trump, but the coronavirus and its spread across the globe. The production slumps in China and quarantine measures in individual countries clearly expose the vulnerability of the export-focussed German economy that is so dependent on an international division of labour.

The global impact of the spread of the novel coronavirus is gradually becoming apparent. The health policy measures impact economic activity, especially industrial activity. Consumer behaviour has also been affected greatly in some industries and countries. The global economy is experiencing a moderate negative trend in both supply and demand.

Even if the health situation in China stabilises and is brought under control rapidly in the rest of the world, the economic impact of temporary production and transport interruptions particularly in China and in other parts of the world is becoming very clear. Since China accounts for a good 20 percent of worldwide industrial production, the huge disturbances in the country will affect the rest of the world well beyond the first quarter. As China is also a sales market for the automotive sector, tourism and many other industries, the Chinese measures to counter the virus will also have negative economic effects in this respect.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

The consequences are already severe. All signs indicate a downturn in growth this year rather than a global economic recovery. On account of the very weak development in Asia, the global economy is only expected to grow by 2.4 percent this year (compared to 2.9 percent the previous year). We agree in this respect with the estimates of the OECD (OECD 2020). This will bring the global economy to the brink of a recession, according to the IMF definition. The virus is already likely to have shaved off more than half of a percentage point in growth this year. Growth in China is expected to fall below five percent, with Japan’s economy almost stagnant and curbed growth in South Korea. In Europe, the risk of recession is particularly high for Italy due to the epidemic and for Germany due to its close economic ties to Asia and Italy. The older estimates of the IMF and the European Commission are no longer up to date as they factor in a lower impact of the virus on global economic activity.

Year-on-year development of exports to the 12 most important export destinations of Germany (2019) 2019 Exports

year on year

in billion euro

Share in %

BIP forecast 2020 in % year on year IMF

EU COM

USA

118.7

4.7

8.9

2.0

1.8**

France

106.8

1.4

8.0

1.3

1.1

China

96.0

3.2

7.2

6.0

5.8**

Netherlands

91.7

0.7

6.9

1.8*

1.3

Great Britain

78.7

-4.2

5.9

1.4

1.2

Italy

68.1

-2.4

5.1

0.5

0.3

Austria

65.9

1.4

5.0

1.6*

1.3

Poland

65.8

3.9

5.0

4.0*

3.3

Switzerland

56.4

4.3

4.2

0.8*

1.6**

Belgium

46.1

4.0

3.5

1.2*

1.2

Czech Republic

44.9

1.4

3.4

2.2*

2.1

Spain

44.3

0.3

3.3

1.6

1.6

Top 12

88.5

1.6

66.5

493.7

-0.1

37.2

1.3

1.2

1 327.8

0.8

100.0

3.3

Euro area World

Sources: IMF (January 2020; *October 2019), European Commission (February 2020; ** November 2019)

If the epidemic continues to spread throughout Europe and other parts of the world and is only brought under control in the medium term, the drop in economic activity will be even greater. The global economy may then grow less than two percent with a very weak first half year.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Global trade has already been disrupted on a massive scale. The downward trend from the fourth quarter of last year is likely to continue in the first six months of the year. This will further weaken the already fragile growth of global investment activity. A recovery of global industrial production is thus not on the horizon.

The consequences of the weak global economy for Germany are obvious. Overall economic output, exports and investment in plant and equipment will suffer significantly, pulling down growth extensively.

We expect decreasing investment in plant and equipment as well as considerably lower exports and practically stagnating imports (with net exports contributing negatively to growth). Economic growth will almost come to a standstill.

Foreign trade is particularly affected. The countries worst hit so far such as China, South Korea, Japan and Italy were the destination of around 15 percent of German exports last year. Furthermore, even before the outbreak of the coronavirus, the growth prospects of the most important destination countries and regions for German exports had already deteriorated considerably (see overview TOP 12 export markets).

For 2020 overall we expect exports of goods and services to drop by around 0.5 percent. This will result in a lower demand for intermediates. As domestic demand still remains stable, we expect imports to rise by 0.8 percent, which would make net exports contribute negatively to growth to the volume of 0.5 percentage points of GDP. For comparison: in 2019 exports increased by 0.9 percent and imports by 1.9 percent resulting in a negative contribution to growth of 0.4 percentage points.

Despite the high level of uncertainty surrounding foreign trade, parts of the domestic economy will continue to provide stability, even if not quite to the same extent as last year. In 2020 we expect a further increase in employment, primarily in jobs subject to social security contributions, though the rise will not be as marked as in 2019. The number of job vacancies is currently at more than 600,000, which is still higher than in 2015. Thanks to the consistently good situation on the labour market, private purchasing power should remain stable. The consumer climate measured by the market research company GfK is still on a high level. The economic prospects of consumers even improved slightly at last count and are now just above the long-term average. Consumers’ income prospects have clouded over slightly but this is not putting them off making new purchases. We expect real private consumption expenditure to increase by 1.2 percent in the current year with state consumption expenditure increasing somewhat more, by around 1.8 percent in real terms.

The combination of weak global economic growth, increased global uncertainty and idle production capacities is having a negative impact on the propensity of companies to invest.

The financing side is largely unproblematic with persistently low interest rates but that is of little help if there are no prospects. With capacity utilisation even lower than during the euro crisis and domestic demand for capital goods at the end of 2019 recording the sharpest drop since the crisis in 2008 and 2009, we expect investment in plant and equipment to decline by three percent.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

BDI forecast for 2019/20: Change in real economic output over the previous year in percent

2020

Federal Government 2020

European Commission 2020

0.6

0.5

1.1

1.0

1.8

1.4

-

-

- Private Consumption

1.6

1.2

1.3

1.1

- Public Consumption

2.6

1.8

2.3

2.0

2.6

0.7

1.7

1.5

- Machinery and Equipment

0.6

-3.0

0.6

0.4

- Construction

3.9

2.5

2.1

-

- Other

2.7

2.5

3.0

-

Exports

0.9

-0.5

2.0

1.6

Imports

1.9

0.8

3.2

2.7

Net Exports, Economic Output

-0.4

-0.5

-0.4

-0.4

Actual figures 2019 GDP, real Consumption

Investment

BDI

Sources: Federal Statistical Office, Federal Government (January 2020) European Commission (November 2019), own calculations

2020 is set to be another good year for the construction industry. Construction companies started out the new year with a healthy buffer of orders. Low interest rates are keeping the demand for residential housing high. Bottlenecks are more likely to be caused by the understaffed municipal authorisation authorities and the lack of available building land. The biggest customers of commercial construction are now utility and waste disposal companies and service providers rather than the economically sensitive industrial companies, which means that weak global economic growth only partially curbs growth in this segment. As Deutsche Bahn AG is planning to further increase its investment in railways this year, we can expect to see robust growth in commercial civil engineering. Investment in public construction should also rise. The German Association of Cities (DST) expects an overproportionate increase in cities’ and municipalities’ spending on construction measures due to the greater financial scope at their disposal. The subdued trend in orders for road construction is probably due more to the transfer of competence for order placement from the federal states to the federal Autobahn GmbH than to economic factors. Through the integration of refugees and recourse to the European labour market the construction industry is still managing to increase its workforce so capacity shortages will be limited.

All in all, we expect construction investment to grow by around 2.5 percent. Investment in other assets (software, research and development) are generally less sensitive to economic development and should also increase by around 2.5 percent. Gross fixed capital formation would then increase by 0.7 percent compared to the previous year.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

We expect GDP to stagnate in 2020 compared to the previous year following price and calendar adjustment. On account of calendar effects (leap year, timing of the public holidays) and the statistical overhang of 0.1 percent, the country may still manage to nudge GDP up by one-half percent year on year. Our estimates are subject to a high level of uncertainty as it is not possible to comprehensively quantify the consequences of the virus at this point. If there are no signs of the countries affected by the corona epidemic returning to normal levels of economic activity in the second quarter, we must expect a decline in Germany’s economic output for this year overall.

Economic policy tasks The coronavirus has dashed the hopes held until recently by international organisations that the global economy would recover this year. The risks of a recession have increased for the global economy as a whole and for Japan, Italy and Germany in particular.

The governments and central banks of the G7 and G20 states must counter the risks for economic activity posed by the virus and take targeted steps to stabilise the confidence of households and companies amid all the uncertainty the virus has created. The Chinese government has already adopted monetary and fiscal policy measures to support the economy. Japan will have to take action to fend off recession. Governments in Europe must closely coordinate their economic policy and respond directly to possible disruptions in supply chains and production with financing instruments and job security measures. Economic activity should additionally be supported through higher public investment and stronger incentives for private investment. The long-term sustainability of public finances must in no way be jeopardised.

The German government, too, should review the option of taking targeted supporting measures and long-term growth measures to buttress the economy against the foreseeable slowdown.

The announcements of Federal Economics Minister Altmaier and Federal Finance Minister Scholz that they will take adequate steps to respond to the crisis are a positive step. The grand coalition must now rapidly agree on economic policy measures and adopt them before Easter if possible. It would make sense to put the regulations facilitating short-term work into effect as in the crisis of 2008 and 2009 without further delay. Germany must not passively slide into a recession.

Even without the outbreak of the coronavirus, the grand coalition would have had to take measures to stimulate growth. There is a huge backlog of investment in Germany. Investment is needed in modern transport and digital infrastructure, in education, research and climate protection. The country needs a reliable investment package that is laid out for at least ten years, with the first measures being implemented this year. It would be fatal not to pursue investments in the future for the sake of a balanced budget. The “black zero� must not become a dogma. The constitutional debt brake is nonnegotiable. Along with public investment, more private investment is also needed. Favourable conditions to stimulate private investment include modernising corporate tax, pulling forward tax breaks that have already been decided, and speeding up authorisation procedures.

Depreciation regulations for investment should be improved without delay. The complete abolition of the solidarity surcharge, including for companies in Germany, is also still on the political reform agenda.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Sources OECD (2020). OECD Interim Economic Assessment. 2 March.

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Authors Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eu Thomas Hüne T: +49 30 2028-1592 t.huene@bdi.eu Editorial/Graphics Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu

This Quarterly Report Germany is a translation based on „Quartalsbericht Deutschland I / 2020“ as of 05 March 2020.

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Economy could stagnate in 2020 | Coronavirus weighs on exports and investment in plant and equipment 12/03/2020

Basic data for national accounts GDP (price, seasonally and calendar adjusted) Change over previous period in percent 2018 2018

2019

2019

Q3

Q4

Q1

Q2

Q3

Q4

1.3

1.8

-0.2

0.6

0.9

0.2

0.7

0.1

-Private Consumption

1.3

1.6

-0.1

0.6

0.8

0.1

0.5

0.0

-Public Consumption

1.4

2.6

-0.4

0.6

1.0

0.5

1.3

0.3

3.5

2.6

0.8

1.0

1.6

-0.3

-0.1

-0.2

-Machinery and Equipment

4.4

0.6

0.7

0.6

1.1

0.0

-1.4

-2.0

-Construction

2.5

3.9

0.7

1.2

2.6

-0.9

0.4

0.6

-Other

4.3

2.7

1.1

1.2

-0.6

1.0

1.0

1.1

Domestic Demand

2.1

1.0

0.9

0.4

-0.1

0.3

-0.4

0.7

Exports

2.1

0.9

-0.9

0.2

1.6

-1.3

1.0

-0.2

Imports

3.6

1.9

1.3

0.6

0.5

-0.3

-0.4

1.3

Total

1.5

0.6

-0.1

0.2

0.5

-0.2

0.2

0.0

Consumption

Investment

Contribution to growth (in percentage points) Consumption

1.0

1.3

0.6

0.9

1.0

1.2

1.9

1.3

-Private Consumption

0.7

0.8

0.3

0.7

0.5

0.8

1.2

0.7

-Public Consumption

0.3

0.5

0.2

0.2

0.4

0.3

0.7

0.6

0.7

0.6

0.7

0.8

0.9

0.5

0.7

0.2

-Machinery and Equipment

0.3

0.0

0.2

0.3

0.2

0.1

0.1

-0.2

-Construction

0.3

0.4

0.3

0.4

0.6

0.3

0.5

0.3

-Other

0.2

0.1

0.2

0.2

0.1

0.1

0.1

0.1

Change in stocks

0.3

-0.9

1.0

0.6

-0.2

-0.4

-2,1

-1.1

Domestic Demand

2.0

0.9

2.2

2.2

1.7

1.2

0.5

0.4

Net exports

-0.4

-0.4

-1.1

-1.3

0.5

-0.5

0.6

-0.6

Investment

Source: Destatis

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