By Christiane von Berg, Coface Economist for Northern Europe, based in Mainz, Germany
Wasn’t the fall of 2020 a good time? Of course, a severe lockdown in Germany was on the horizon, but there was some promising news about more effective vaccines. We economists breathed a sigh of relief, believing that we would have a much clearer view of the economic future in the fall of 2021.
It was definitely a mistake. To quote Goethe’s Faust:
“And here, poor fool! With all my knowledge / I stand, no wiser than before.”
Currently, with the latest news arriving every day, the economic outlook remains uncertain. As a result, some forecasts become obsolete more quickly than can be called “gross domestic product analysis”. So it’s highly likely that this article’s “bold” predictions won’t stay accurate for long – but, at least, the following overview should bring some more clarity into the jungle of current economic affairs.
The German Winter Economy 2021: Where Are We Now and Where Are We Going?
Economically, 2021 has been a mixed year for Germany, starting off on the wrong foot: we had severe containment until April with small interruptions, then reluctant opening stages until June. It wasn’t until July 2021 that normal life returned. However, at that time, the strong recovery in manufacturing over the last few quarters was again slowed by a severe shortage of inputs and high transportation costs. So we started the year with a 2% contraction in GDP in the first quarter (Q1) of 2021, followed by two quarters of moderately positive growth. However, this was not enough to bring the economy back to pre-crisis levels: in the third quarter of 2021, we were still 1.1% below the winter 2019/20 level, with only moderate growth. scheduled for the next few quarters as well, assuming lockdown for unvaccinated people does not turn into full lockdown again. The German economy is not expected to recover noticeably stronger until the second half of 2022, assuming the shortage of inputs slowly dissipates and the manufacturing sector is no longer slowed down.
Global trends: global competition for goods
The global shortage of inputs did not come out of nowhere and, in retrospect (like so many things), did not come as a surprise. Globally, the Covid-19 pandemic has resulted in the biggest recession since World War II. Thus, unlike the financial market crisis of 2009, all the countries of the world have been affected by the current recession, and are therefore all (more or less) in a phase of recovery since 2021. This means that global demand is at a low level. historical level. high – but the supply of inputs cannot be expanded so easily and so quickly. What’s more, the supply itself is tightening due to current restrictions on coronaviruses, with vaccine progress varying wildly from economy to economy. In addition, there are extreme climatic phenomena: floods, droughts, forest fires, etc. And if that weren’t enough, there are the problems with transport and China.
China has implemented a “zero-Covid” policy – potentially, in part, not to jeopardize the Beijing Winter Olympics in February 2022. As soon as even a few cases of Covid-19 arise, the Chinese government imposes a lockdown on entire cities with millions of inhabitants, including their ports. This creates a congestion of container ships, which then continues globally from port to port. And when the crew, although vaccinated, are prohibited from disembarking because their vaccine is not accepted in a given region (eg Chinese vaccines in the European Union), this makes it difficult to unload the cargo. Finally, China has gone to great lengths to ration energy. On the one hand, it is for environmental reasons (the sky of Beijing is supposed to be blue for the Olympics). On the other hand, this is due to blockages in coal production. This puts a strain on industrial production in China, and consequently on all consumer industries and countries. This shortage of inputs will continue until global demand calms down and supply is both stabilized and expanded, thereby easing the pressure on prices.
Labor market and inflation: the pressure continues to increase
It is precisely these two aspects (shortage of goods and pressure on prices) that we find in the German economy. On the labor market side, things are going relatively well for the Federal Republic: the unemployment rate returned to pre-crisis levels in October 2021. The leave only intervenes sporadically, but it is a persistent problem in the automotive sector, where the shortage of computer chips brings assembly lines to a standstill for weeks. In addition, the severe shortage of skilled workers determines the job market, and could therefore soon lead to higher wage demands – especially given the current rate of inflation. To make up for this alone, wages are expected to increase by more than 5% from the previous year. Several factors contribute to inflation, including temporary effects such as the VAT cut from 2020 and the carbon dioxide tax hike in January 2021, but also the fact that producers and retailers pass on their costs. high production on customers. As the latter phenomenon fades less quickly, the inflation rate should indeed be higher than the annual average in 2022 (3.3% in 2022 after 3.1% in 2021).
Monetary policy: will the ECB react?
The European Central Bank is very concerned about inflation rates: if consumer prices stay high for longer, wage settlements could be particularly high, thus initiating a permanent spiral of upward prices. The ECB would then be forced to implement a less expansionary monetary policy by reducing bond purchases. However, it will likely take a long time to find a majority for this decision. It is more likely that the ECB will suppress inflation for as long as possible in order to strengthen the public finances of many euro area countries with its policies. Thus, the low deposit rate will likely remain unchanged in 2022.
Businesses: all’s well that ends well ?!
In 2021, the âparadoxâ of low insolvency figures continued. Although individual sectors are state-backed, companies have so far reported no payment issues, and surveys of company payments show declining insolvency rates. This phenomenon is likely to continue until the government ends its intervention in the market. Until then, however, we are not out of the woods: although the number of bankruptcies is decreasing, insolvency losses are increasing. Measured in terms of outstanding bankruptcy liabilities (published by the Federal Statistical Office), Germany reached a level of 45.5 billion euros in September 2021 (latest available data). This is already more than the total liabilities for the whole year 2020, and means that 2021 will be the “most expensive” year since 2009, because although there are few bankruptcies in Germany, they are very important. . As of yet, there is no end in sight for this trend in 2022.
This article first appeared in issue 4/2021 of Der CreditManager and has been updated and translated to English.