Germany

The German economy contracted by close to -5% in 2020 as the Covid-19 pandemic took its toll. In 2021, after a rather disappointing economic start, with GDP contracting by close to -2%q/q in Q1, the economic prospects for Germany are now very promising. In view of the recent decline in new infections and good progress on the vaccination front, the service sector is likely to have already started to catch up in May, accompanied by the first easing of Covid-19 restrictions. In the coming months, one positive economic record after the next can be expected, in contrast to last year's plunge into the abyss. We expect an unprecedented consumption rebound to materialize, fueled by pent-up demand in a context of sharply declining economic uncertainty. Meanwhile the ongoing industrial upswing – despite lingering rebound bottlenecks in the form of component shortages that should hold back production momentum - should fuel a capex boom. Overall, GDP growth should come in at +3.4% in 2021 and +3.8% in 2022. As a result, the German economy will already return to pre-crisis GDP levels in winter 2021. However, one should be prepared for some economic restart difficulties. The abrupt reopening of the economy is likely to lead to acute labor shortages, especially in sectors that have been stuck in Covid-19-induced hibernation for months including accommodation and food services.  The imbalance between rapidly rising labor demand and impaired supply – Covid-19 has weighed on immigration flows and vocational training programs and, in view of poor prospects in some sectors, led to a reorientation of workers to sectors with brighter prospects - can be reduced by training offensives and at least temporarily higher wages.

In 2019, Germany’s debt-to-GDP ratio fell below the 60% Maastricht criteria for the first time in 18 years after registering at around 80% of GDP as recently as 2012. However, Covid-19 has put an end to the continuous downward trend in government debt that had been driven by buoyant economic growth, declining debt servicing costs and a relatively moderate expansion in government spending. Fiscal rescue measures coupled with the sharp setback in economic growth will keep the public deficit clearly above the 3% mark in both 2021 and 2022. As a result, government debt in relation to GDP looks set to stsbilize around 70% until 2022 before embarking on a gradual downward trend. - June 2021