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OECD: Germany is facing a deep recession message


FRANKFURT (Dow Jones) – According to the Organization for Economic Cooperation and Development (OECD), Germany is facing a deep recession as a result of the corona pandemic, but its health system has proven to be well equipped and the consequences have so far been mitigated.

Should there be a second Covid-19 wave with noticeable restrictions, the German gross domestic product (GDP) would decrease by 8.8 percent in the current year. If the pandemic actually subsides by the summer, a decline in GDP of 6.6 percent is still to be expected.

Three months ago, the Parisian economic researchers had still expected an increase of 0.8 percent for 2020 and an increase of 1.2 percent the following year. Now they expect growth rates of 5.8 in 2021 or only 1.7 percent with a new version of the virus countermeasures.

Good health care has mitigated the downturn

So far, the restrictions due to the widespread use of corona tests and the high capacities were shorter and less stringent than in other large countries in Europe. Although this had alleviated the economic downturn, uncertainty and lower demand in the key sectors, especially in the manufacturing sector, would still have had a significant impact on corporate investment and export activity. A second wave would undermine the benefits of early and well-organized easing, the OECD said.

The export-oriented economic sectors in particular will be affected. In 2020, exports are likely to collapse by 13.6 or 17.1 percent (depending on the scenario) and recover rather slowly in the following year at 8.5 or 1.4 percent.

digitalization must be tackled quickly

The organization considers the extensive government support measures, which would have strengthened the health system and protected jobs and companies, to be helpful. However, she warns that the digital transformation must be accelerated in future cases. This could be achieved by expanding e-government services and expanding infrastructure, introducing digital applications in small businesses and developing skills in these areas.

Critical words on financial sector

The OECD takes a critical look at the German financial sector. The risk that the recession would worsen and lengthen as a result of the low profitability and the weak capital base of German banks was particularly great. But she adds that government intervention could mitigate the economic consequences. The recommendation is to make preparations to recapitalize banks, if necessary, in a transparent manner. Requirements such as an appropriate compensation for risks taken, clear conditions (e.g. regarding dividends) and a specified time frame should apply.

Long-term consequences for the labor market

In terms of employment, the crisis could lead to significant changes in labor demand in individual sectors and regions, which could undermine the benefits of short-time work. If this happens, active labor market policy measures are likely to be necessary. The unemployment rate is likely to rise, but more cautiously than in other countries. For 2020, the OECD expects 4.5 percent in the favorable scenario and 4.6 percent in a second wave and 4.3 or 5.3 percent in the coming year compared to 3.2 percent in 2019.

Supply chain problems as a burden

If there is a second wave of Corona, supply chain problems that are currently hindering the automotive industry are likely to become a greater danger. Because it threatens the suppliers’ financial viability. Restructuring the supply chains to reduce their vulnerability could, in turn, slow down long-term productivity growth. The organization also sees dangers for entrepreneurship. It could decrease if the risks and costs of corporate insolvencies are felt to be too high.

There is praise for the government’s decisions to be transparent in providing the means to deal with the crisis, while ensuring that temporary programs such as the extension of short-time work and liquidity support have a clearly defined duration.

Don’t forget climate protection policy

At the same time, the organization warns that the Covid 19 crisis should not lead to the recent advances in climate protection policy, such as the introduction of CO2 pricing in the transport and building sectors. Rather, the reconstruction measures must be in line with Germany’s long-term decarbonization goals.

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(END) Dow Jones Newswires

June 10, 2020 04:23 ET (08:23 GMT)

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