Germany’s Post-COVID-19 Recovery in Five Charts

IMF News, January 19, 2021

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The economic shock of COVID-19 on Europe’s largest economy has been profound.
Germany’s early and vigorous public health response has led to some of the lowest mortality rates in Europe.
Containment measures caused a substantial drop in business activity, especially in contact-intensive sectors.
Economic activity started recovering following the re-opening in late April, but a new wave of infections in the fall triggered another round of lockdowns.
Overall, the economy likely contracted by over 5 percent in 2020.
Economic growth is expected to pick up in 2021 as vaccines become widely distributed, but output is not projected to return to its precrisis level before 2022.

Fiscal policy should remain supportive until there is firm evidence of a sustained recovery.
The government implemented sizable measures—among the largest in advanced economies—to combat the pandemic, making use of long-accumulated fiscal space.
Initial measures included:
- scaling up medical spending;
- expanding the short-time work benefit (“Kurzarbeit”);
- extending the duration of unemployment benefits;
- providing liquidity to firms; and
- expanding loan guarantees.
A stimulus package in June focused on:
- boosting domestic demand through a temporary value-added tax cut;
- expanding support for small businesses; and
- increasing public spending on green investment, digital infrastructure, and healthcare.
In November and December, further measures were introduced to support the most affected businesses during the renewed lockdowns.
Public debt remains sustainable and should not hamper vigorous policy action.
The pace of fiscal normalization should be carefully calibrated to the epidemic's path and evolving economic conditions.

Germany’s well established short-time work subsidy, “Kurzarbeit,” has played a critical role in retaining jobs.
Kurzarbeit contributed to Germany’s remarkable labor market resilience during the global financial crisis and is proving critical again during the pandemic by preserving jobs and stabilizing incomes.
Limitations and distributional effects:
- Most of the job losses to date have been borne by marginally-employed workers who are not eligible for Kurzarbeit.
- The majority of these marginally-employed workers are employed in hard-hit contact-intensive services, and around two-thirds of them are women.
- Young workers will likely suffer scarring effects to their long-term earnings and career prospects.
- Older workers may permanently exit the labor market early.
Policy recommendations to protect vulnerable groups and support reintegration:
- Supplement Kurzarbeit with targeted hiring incentives;
- Expand the social safety net; and
- Step up training.

Phasing out support for corporate borrowers during the recovery period will require a careful balancing act.
So far, bankruptcies have not risen, due partly to the insolvency moratorium, but might rise as exceptional policy support is rolled back.
Lending conditions could tighten as other measures to support borrowers expire.
Policy recommendations:
- Ensure a smooth transition by continuing some direct support for viable firms, especially those that are key for the functioning of the economy;
- Facilitate the exit of unviable ones; and
- As the recovery gathers momentum, make business support more targeted to prevent credit misallocation and the rise of “zombie” firms.

The German banking sector is broadly resilient.
Thanks to strong equity buffers and multi-pronged borrower support policies, most banks are expected to absorb the shock to their capital ratios without breaching regulatory capital requirements.
Supervisory stance recommended:
- Allow banks to continue to dip into their capital buffers; and
- Extend dividend restrictions until the recovery gains momentum.
Medium-term concern:
- Long-standing profitability weaknesses, exacerbated by the pandemic, call for faster restructuring efforts by banks.

Source: Germany’s Post-COVID-19 Recovery in Five Charts — IMF News, January 19, 2021.