Germany: the “locomotive” surmounts crisis

German chancellor Olaf Scholz said scientific forecasts have indicated that the country’s omicron wave is reaching its peak, which allows the authorities to set their sights on a first opening step.

A worker at the Volkswagen assembly line in Wolfsburg, Germany, April 27, 2020 (Photo: Reuters)
A worker at the Volkswagen assembly line in Wolfsburg, Germany, April 27, 2020 (Photo: Reuters)

However, the German Government’s intent to ease COVID-19 restrictions to bring economic activities back to normal to reduce the damage for the “locomotive” of the European economy was said to be faced with many challenges.

According to data from the Federal Statistics Office of Germany, COVID-19 pandemic caused Europe's largest economy to shrink significantly by the end of 2021. The gross domestic product (GDP) in the fourth quarter of 2021 fell by 0.7 percent in the third quarter of 2021, after adjustment for price, seasonal and calendar variations, and by 0.3 percent compared with the forecast due to the heavy pressure of the Delta variant infection wave before Christmas and the arrival of the Omicron variant in the fourth quarter of 2021 along with restrictive measures. Therefore, after economic output grew again in the summer, the recovery of the leading economy in Europe slowed down by the end of 2021. The personal consumption in the fourth quarter decreased compared to the previous one mainly because retailers, restaurants and service providers were once again subject to stricter anti-epidemic regulations. In contrast, the Government’s consumer spending increased in the fourth quarter, while construction investment fell. Overall, the full-year economic output in 2021 reached 2.8 percent, better than the previous forecast of 2.7 percent. However, this could not offset the decline of 4.6 percent following the outbreak of the pandemic in 2020.

Experts fear that the German economy will continue shrink again and face the risk of falling into another technical recession, defined as two consecutive quarters of contraction. The pandemic’s complicated development forced the German government to cut its forecast of annual growth in 2022. The Economy Ministry now predicts that the country’s GDP will expand by 3.6 percent, down from the 4.1 percent of the previous forecast. The rapid increase in the number of new cases of infection due to Omicron variant is the cause of the slowdown in the recovery, as evidenced by the moderate economic activity in the first months of this year, especially in the service industries.

The export-oriented country, which has been hit hard by global supply chain bottlenecks and raw material shortages caused by the pandemic, has experienced a slower recovery than other major economies in Europe. Automotive manufacturing has been the hardest hit industry, with a decline of output in several factories of giants such as Volkswagen, BMW and Daimler due to semiconductor chip shortages. The German economy is estimated to have lost 350 billion EUR, mainly due to a decline in personal consumption as well as blockade measures to prevent epidemics.

In the context that Europe is still a "hot spot" of the COVID-19 pandemic, the efforts to surmount the crisis and boost the economic recovery in Germany still face many risks. The experts warned that reopening soon poses the risk of an increased burden on the health system and people continue to be asked to act cautiously and responsibly. The increased coverage of vaccination against COVID-19 is still an important factor in ensuring sustainable control of the pandemic and accelerating economic recovery.

The recovery of the largest economy in Europe will only return to normal speed when the wave of COVID-19 slows down and the “breaks” in the global supply chain are gradually overcome in 2022. Consumer spending will be the main growth driver in the context that businesses gradually recover and meet the pent-up demand of the people. In addition, industrial factories also hope to achieve higher exports during the global recovery process after the pandemic shock. However, even if Germany's GDP reaches pre-crisis levels at the end of 2022, there will be still a significant gap in economic activity compared to the period before the pandemic. According to analysts, it will not be until economic growth reaches a strong pace in the next few years that the gap between value added and income caused by the pandemic can be gradually narrowed.

Translated by NDO