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Germany: Austerity Mindset No More


Germany has been one of the more effective countries in managing through the coronavirus’ impacts. German coronavirus cases which peaked in April never really overpowered the health system and have since dropped to more manageable levels. This was possible on account of rather nimble thinking on the part of the German government rather than stalling over decisions – they were one of the first countries to implement a quick lockdown and then followed this up with widespread testing.

Whilst the handling of the coronavirus has been quite skilful, the surprise came when the Merkel government announced substantial fiscal stimulus, as this was rather unbecoming of their traditional moves. Over the last decade or so, the German government has been known for its more restrictive policy with regards to its fiscal balances.

It is worth remembering that during the previous crisis, the German government was reluctant to spend more than 2 percent of GDP on fiscal stimulus. Conversely, as a response to the current pandemic, the fiscal support is expected to aggregate to more than 13 percent of GDP.

Early during the lockdown, the German government facilitated direct cash transfers to companies and employees. The fiscal stimulus to counter the pandemic’s effects has been such that they have been able to not only protect corporations and mitigate the employment situation (by avoiding insolvencies and large-scale layoffs), but they’ve also been able to put in place a plan to drive through a sustained economic recovery. In all, Germany has announced more than EUR 450 billion so far as immediate fiscal stimulus – the largest initiative in Europe – circa 30 percent above market estimates.

Much of Germany’s success over the last decade or so has come from being cost-effective and having a splendid export culture. Exports as a percentage of GDP at almost 50 percent are amongst the top tier of key global economies.

Looking into the macroeconomics of it, the policy response by Germany to the current crisis will likely have a relatively more wholesome impact on employment conditions, enabling them to cope with this crisis better than most other countries. Even though unemployment has gone up in recent months, compared to some of the other developed nations, Germany’s unemployment rate of 3.9 percent is quite low.

Economic data also showed an uptick in employment confidence and most recently, the German Institute for Economic Research (IFO) showed that the employment barrier improved from 88.3 in May to 92.3 in June, with a monthly improvement seen across all four reportable sectors – manufacturing, services, trade, and construction.

Furthermore, the Gfk consumer sentiment indicator beat market estimates of -12 and rose to -9.6 from -18.6 in the previous month. There has been an improvement in both economic and income expectations as well as the tendency to buy.

The car industry, which is a key industry for the German economy, saw new car registrations grow by 30 percent in May after it had fallen by more than 30 percent in each of the two preceding months.

The Composite PMI, an indicator of economic health for the manufacturing and services sector beat market expectations of 44.2 and last month’s figure of 32.3 to hit 45.8 in June.

Conclusively, although macroeconomic data has improved, the future of the German economy will all depend on how this fiscal stimulus will be applied. Overall, it is no doubt that there is a threat for globalisation to decline but Germany has the ability to strengthen itself and Europe to meet those challenges.

This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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