Germany braced as hard lockdown set to trigger double-dip recession

Germany is heading for a double-dip recession this winter after Berlin imposed a hard lockdown, economists have predicted, denting hopes that Europe’s largest economy will rebound to pre-pandemic levels by the start of 2022.

Chancellor Angela Merkel’s government announced at the weekend that schools and most shops would be closed from Wednesday until January 10 in an effort to contain a surge in coronavirus infections.

“Germany must brace itself for a second recession,” said Jörg Krämer, chief economist at Commerzbank. “The additional closures affect, among other things, all stores except those for daily needs . . . hairdressers and largely schools and day care centres for children.”

Mr Krämer said the hard lockdown would knock 4 percentage points off Germany’s daily growth rate, compared with a 2.5 percentage point daily hit from the previous “lockdown lite”.

The economy would shrink 1 per cent in the fourth quarter and 0.5 per cent in the next quarter, he said — meeting the definition for a recession, which is two successive quarters of negative growth. But he stuck to his forecast for 4.5 per cent growth next year.

Carsten Brzeski, economist at ING in Frankfurt, said it was “too early to call” whether the country’s economy would decline in the first quarter of next year, while he cut his forecast for the current quarter from minus 1 per cent to minus 1.5 per cent.

Germany’s economy will shrink 1 per cent in the fourth quarter and 0.5 per cent in the next quarter, according to Jörg Krämer, chief economist at Commerzbank © Alex Kraus/Bloomberg

“My guess is that the lockdown measures will not be eased significantly, which increases the chances of a technical recession and, even worse, more structural damage in the form of bankruptcies,” said Mr Brzeski. The hard lockdown would postpone Germany’s return to pre-pandemic levels from the final quarter of next year until the first quarter of 2022, he added.

Germany has benefited from having a large manufacturing sector, which has been less disrupted by coronavirus curbs, while enjoying rising exports to China. This was underlined by Eurostat data published on Monday showing eurozone industrial production outstripped expectations by climbing 2.1 per cent in October. 

“Whereas consumer spending is in for a pronounced setback, resilient German industry will continue to cushion the negative impact thanks to ongoing tailwind from China,” said Katharina Utermöhl, economist at Allianz.

However, analysts worry that Germany’s control over the virus has slipped after the country reported a record of nearly 30,000 new infections and 598 deaths from Covid-19 on Friday.

“After being the relative European success story in wave one, Germany has struggled over the last few weeks and one would expect Mrs Merkel to be keen to get this under control as a priority in the last year of her 16-year reign,” Deutsche Bank analysts said in a note to clients on Monday.

“However, in the short term this will be a blow to activity and confidence even if the damage will be limited by knowledge of the imminent vaccine rollout,” they added. Deutsche Bank has stuck to its forecast for the country’s economy to contract 1.5 per cent in the fourth quarter, before stagnating in the first quarter of next year.

Germany’s central bank slightly raised its forecast for the economy to rebound to its pre-pandemic level by the start of 2022, outpacing the overall eurozone, according to forecasts published on Monday but compiled before the latest lockdown was announced.

“The assumption here is that the containment measures will be rapidly eased from spring 2021 onwards due to medical progress, and finally be phased out completely in the first months of 2022,” the Bundesbank said. It forecast the economy would shrink 5.5 per cent this year, before growing 3 per cent next year and 4.5 per cent in 2022.

Meanwhile, France’s central bank forecast that its economy would rebound by 5 per cent next year but would reach its pre-pandemic level of output only by mid-2022 after shrinking 9 per cent this year. 

The Banque de France forecasts were slightly more pessimistic than its previous predictions in September, but close to those it made in June, as a result of the “negative shock” of the second nationwide lockdown that is still partly in force. 

Fabio Panetta, executive board member of the European Central Bank, warned that 2021 would be another “pandemic year” requiring continued support from fiscal and monetary policy. If needed, the ECB could extend its emergency bond-buying programme, even after expanding it to €1.85tn last week, said Mr Panetta in a speech on Monday.

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