Europe’s largest economy suffered its worst slump on record in the second quarter, as the coronavirus pandemic took a heavy toll on exports and consumer spending.
Despite the historic collapse in German GDP, the unemployment rate in the world’s fourth biggest economy ticked just a few notches higher — thanks to a short-time work program that has roots dating back a century. It has been frequently tapped to protect jobs in Germany since the oil crisis in the 1970s.
According to Germany’s federal statistics office, second quarter GDP declined 10.1% on the first quarter, its worst fall since records began in 1970. That’s equivalent to a drop of 11.7% on the same period last year. EU GDP data for the quarter will be published on Friday.
With the exception of government spending, all areas of the German economy including exports, imports, investment and household spending, suffered sharp falls.
The drop wiped out nearly a decade of growth and was “even worse than expected,” according to Berenberg economist Florian Hense.
Yet despite the loss of output, Germany’s unemployment rate rose to just 4.2%, from 3.8% at the end of March, according to EU data published Thursday. That translates into the loss of 203,000 jobs, taking total unemployment in Germany to 1.86 million. EU unemployment stood at 7.1% in June, up from 6.5% in March.
It’s a far cry from America’s 11% jobless rate. Like Germany, the US economy recorded its worst drop on record between April and June, falling by 9.5%, or almost 33% at an annualized rate.
Despite adding 7.4 million jobs through May and June, the United States remains down nearly 12 million jobs since February, according to the Bureau of Labor Statistics. US unemployment stood at 17.8 million in June. Jobless claims rose for the second week in a row last week, in a sign that America’s recovery may be stalling.
The huge discrepancy in unemployment rates can be traced back to Germany’s “Kurzarbeit” program. Short-time working protects jobs by allowing companies to reduce hours and wages, which are then subsidized by the state.
Some 6.7 million German employees are currently working in this way, according to ING’s Eurozone chief economist, Carsten Brzeski.
Germany has also unleashed one of Europe’s biggest coronavirus stimulus packages, spending €130 billion ($145 billion) on everything from electric car subsidies and tax breaks to relief for families with children. It’s also helping to pay for a €750 billion ($884 billion) recovery package for the EU countries hardest hit by the crisis.
Economists said the trough of Germany’s economic recession was likely reached in April, with activity rebounding from May onward. That upswing could continue in the current quarter through September.
“The worst quarter ever could be followed by the best quarter ever,” said ING’s Brzeski, adding that the economy is also poised to benefit from holidaymakers taking their summer vacations at home rather than traveling abroad.
Still, there are some signs that the rebound is losing steam, according to Commerzbank economists Jörg Krämer and Ralph Solveen.
Factories slow to recover
They point to truck traffic as one measure. A good indicator of industrial production, truck traffic showed a significant recovery from late April but has hardly increased at all since the middle of June, they said in a note to clients.
Manufacturing is expected to take much longer to recover than services and construction, according to Brzeski, given the disruption to global supply chains and economic weakness in important trading partners, such as the United States.
At the heart of German industry is Volkswagen, the world’s largest automaker. It swung to a €1.4 billion ($1.6 billion) operating loss in the first half, from profit of €9.6 billion ($11.3 billion) a year earlier. Revenue fell by 23% and the company sold 27% fewer cars to customers.
Volkswagen still expects to post an operating profit for 2020, maintaining earlier guidance, but it reiterated a previous warning that global demand for new vehicles is likely to fall 15% to 20% on 2019. “The first half of 2020 was one of the most challenging in the history of the company due to the Covid-19 pandemic,” CFO Frank Witter said in a statement.
The company employs over 294,000 people in Germany, or nearly half its total workforce.
— Julia Horowitz, Anneken Tappe and Tami Luhby contributed reporting.