German Economy Could Rebound In Summer After Covid-19 Contraction

The German economy is headed for a swift recovery from the Covid-19 pandemic this summer following a more than expected shrinking of the economy ion the first quarter. This optimistic picture of the German economy is based on better German business morale as it hit a two year high in May as pandemic induced restrictions were eased and with a fall in rates of infections of the disease.

The reading of Ifo business climate index reflected a jump to 99.2, up from April’s revised 96.6 which also comfortably beat analysts’ forecast of 98.2 even with many companies reporting a build-up of supply bottlenecks.

“The German economy is picking up speed,” Ifo President Clemens Fuest said.

There was greater satisfaction among most of the 9,000 firms in manufacturing, the service sector, trade and construction who participated in the survey, with their current situation and were quite optimistic about their businesses in the next six months.

Ifo economist Klaus Wohlrabe said that the survey also pointed towards a quarterly growth rate of 2.6 per cent in the April to June quarter and 2.8 per cent in the July to September quarter.

Federal Statistics Office data showed earlier on Tuesday that there was 1.8 per cent quarter on quarter contraction in German GDP in the first quarter and a 3.1 per cent year on year contraction which was significantly weaker than the euro zone average.

Consumers put more money than ever into savings because of the coronavirus restrictions in force during those months as the savings rate increased to an unprecedented 23.2 per cent.

And with the German government making investments worth billions of euros into job protection schemes and extra child benefits, there was an increase in the disposable income of German households. However there was a 5.4 per cent quarter on quarter drop in household spending as consumption was curbed because of restrictions imposed to curb the spread of the pandemic in the country.

While calling the drop as being “colossal”, VP Bank Group economist Thomas Gitzel said that the German economy would soon show a rebound with easing of restrictions and ultimately complete lifting of curbs even as infections were dropping and Covid-19 vaccines was in progress quite smoothly.

“We’re heading towards a relaxed summer in which retailers in German cities can expect consumers to splash out,” he said.

In the first quarter, there was a slight drop in company investments in machinery and equipment even though there was a rise in construction activity in the same period, showed GDP data.

Increase in costs because of bottlenecks in supply chain in the manufacturing and construction industry was being passed on to customers during the quarter, Wohlrabe said.

He said that difficulties procuring raw materials was reported by two out of five firms in construction sector and “more and more companies indicate that they want to increase their sales prices”.

KfW bank economist Fritzi Koehler-Geib said her bank had raised its 2021 growth forecast to 3.5% from 3.3% “despite the poor start to the year.”

“A post-corona boom is emerging – even if the air is starting to get thin in the manufacturing sector, where business sentiment is already at a very high level,” he added.

(Adapted from

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability

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