Germany: Economy records sharpest contraction on record in Q2
August 26, 2020
GDP contracted at a sharp pace of 9.7% on a seasonally-adjusted quarter-on-quarter basis in the second quarter (previously reported: -10.1% s.a. qoq), coming in well below the 2.0% contraction logged in the first quarter. Q2's reading marked the worst since current records began in 1970, and meant the economy entered recession for the first time since 2013.
The downturn was broad-based. Household spending fell a staggering 10.9% in the second quarter, which was below the first quarter's 2.5% contraction, as the full force of containment measures enacted in March was felt. Fixed investment also contracted at a quicker rate of 7.9% in Q2 from the 0.5% contraction in Q1. Government consumption, however, improved to a 1.5% expansion in Q2 (Q1: +0.6% s.a. qoq).
On the external front, exports of goods and services plummeted 20.3% on a seasonally-adjusted quarterly basis in the second quarter, which was notably below the first quarter's 3.3% contraction. This came as foreign lockdowns and restrictive measures weighed on export demand. In addition, imports of goods and services dropped at a steeper pace of 16.0% in Q2 (Q1: -1.9% s.a. qoq), reflecting weakened domestic demand due to coronavirus containment measures.
On an annual basis, meanwhile, GDP declined 11.3% in the second quarter, coming after the previous quarter's 1.8% contraction.
Looking ahead, the German economy is expected to exit the recession in the third quarter. Economic activity should recover in the second half of the year due to the easing of restrictive measures, as evidenced by available data for Q3. However, the balance of risks is skewed to the downside as the number of new coronavirus cases has ticked up in recent weeks, which could bring about stricter measures that derail the recovery. Moreover, the expected pickup in activity in H2 will be unable to prevent the economy contracting at the steepest pace in many decades this year.
Carsten Brzeski, chief Eurozone economist at ING, added:
“The contraction of the economy was somewhat milder than in the first estimate, illustrating how difficult it currently is to capture the lockdown-driven swings in any economy with traditional macro models. […] Looking ahead, it does not take a rocket scientist to predict that the economy will have one of its best quarterly performances ever in the third quarter. […] At the same time, however, the structural impact of the crisis is also surfacing, limiting too much growth enthusiasm.”
Author: Jan Lammersen, Economist