REGIONAL REPORT
Looking beyond the near term , emphasis should be on “ building better for the future ” by supporting the transformation toward a smarter , greener economy
According to the IMF ’ s latest economic assessment of Germany , priority should be placed on setting the economy on a sustained recovery path by minimising labour market scarring , protecting vulnerable people and ensuring that viable firms remain in business .
Looking beyond the near term , emphasis should be on “ building better for the future ” by supporting the transformation toward a smarter , greener economy .
“ Germany has , to date , been relatively successful at managing the pandemic , but the economic shock has still been profound . The country ’ s early and vigorous public health response has led to some of the lowest mortality rates in Europe . However , the 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 Autumn has triggered another round of lockdowns . Overall , the economy probably contracted by over five per cent 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 pre-crisis level before 2022 ,” commented Mai Chi Dao and Aiko Mineshima in the IMF ’ s Country Focus on Germany .
German fiscal policy , they say , should remain supportive until there is firm evidence of a sustained recovery .
Battling COVID-19
Making good use of long-accumulated fiscal space , the German government implemented sizable measures — among the largest in advanced economies — to combat the pandemic . Apart from scaling up medical spending , initial measures provided critical support to households and businesses by 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 . The pace of fiscal normalisation should be carefully calibrated to the epidemic ’ s path and evolving economic conditions . Public debt remains sustainable and should not hamper vigorous policy action ,” added Mai Chi Dao and Aiko Mineshima .
According to the IMF ’ s German Country Report , Germany ’ s wellestablished short-time work subsidy , “ Kurzarbeit ,” has played a critical role in retaining jobs , but cannot by itself fully address the labour market shock . Kurzarbeit contributed to Germany ’ s remarkable labour market resilience during the global financial crisis and is proving critical again during the pandemic by preserving jobs and stabilising incomes . That said , most of the job losses to date have been borne by marginallyemployed workers who are not eligible for Kurzarbeit . The majority of
these workers are employed in hard-hit contact-intensive services , and around two-thirds of them are women .
“ Young workers will probably suffer scarring effects to their long-term earnings and career prospects , while older workers may permanently exit the labour market early . To protect these vulnerable groups and support their re-integration into the labour market , Kurzarbeit should be supplemented with targeted hiring incentives , an expanded social safety net and stepped-up training ,” said Mai Chi Dao and Aiko Mineshima .
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 . Meanwhile , lending conditions could tighten as other measures to support borrowers expire .
“ The government should ensure a smooth transition by continuing some direct support for viable firms , especially those that are key for the functioning of the economy , while facilitating the exit of unviable ones . As the recovery gathers momentum , support for businesses should be more targeted to prevent credit misallocation and the rise of ‘ zombie ’ firms ,” said the IMF .
The German banking sector is broadly resilient , but capital relief and restrictions on dividend payouts should remain in place until the recovery proves sustainable . Thanks to strong equity buffers and multi-pronged
borrower support policies , most banks are States of expected to absorb the shock to their capital ratios
Germany without breaching regulatory capital requirements . “ To maintain financial stability , supervisors should allow banks to continue to dip into their capital buffers and extend dividend restrictions until the recovery gains momentum . In the medium-term , long-standing profitability weaknesses , exacerbated by the pandemic , call for faster restructuring efforts by banks ,” concluded the IMF .
Machine tool market
Orders received by the German machine tool industry in the third quarter of 2020 were 29 per cent down on the same period in 2019 .
Germany has , to date , been relatively successful at managing the pandemic , but the economic shock has still been profound
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