The Effects of the Corona Crisis on the German Economy

1) General effects on economic development nationally and internationally

The most visible effects on the economy can be tracked at the stock market. According to BBC, in March the Dow and the FTSE were hit by their strongest one-day declines since 1987.1 It was stated that “Investors fear the spread of the coronavirus will destroy economic growth and that government action may not be enough to stop the decline”.

In terms of a fast counteraction, central banks in many countries have cut interest rates, to lower the price for borrowing and thus encouraging to spend more, which would lead to a new boost to the economy.2

Estimations by the Organisation for Economic Cooperation and Development (OECD) show that the economic growth might slow down dramatically, reaching “its slowest rate since 2009 this year”.  The forecast indicates 0,5% less growth in 2020, compared to November 2019. Due to many industry´s reliance on China’s industries, the global growth could even drop to 1.5 percent in 2020, nearly half the rate originally projected, if the impact on advanced economies turns out to be as severe as the disruptions suffered by China, the OECD warns.3

Travel industry to cope with hardest hit

In efforts to contain the virus from further spread, airlines have cut flights, tourists had to cancel holiday and business trips and governments around the world restricted the travel up to a full lockdown, where only urgent trips are allowed. In addition to travel restrictions, the EU is closing borders and doesn´t allow entries from outside the bloc. This, in total badly damaged the travel industry. An air passenger market analysis shows, that with 80% less flights, the industry-wide revenue passenger kilometres (RPKs) had the largest decline in recent history. In seasonally-adjusted terms global passenger volumes shrinked to levels last recorded in 2006. Furthermore, even if travel bans are lifted, the industry expects people will initially keep their reluctance to book flights.5

Food and hotel service industry at stake

When at first the recommendation to stay at home caused declines in restaurant and hotel reservations, the closure of restaurants internationally lead to a severe loss of income of almost 100%. Where possible, restaurant owners try to at least ensure some revenue by offering take-away or delivery service.6

The economy is not only threatened by a further declining growth rate, but also due to interruptions in the supply chain. This affects every sector, from manufacturing industries, medical sector to the supermarkets. In cooperation with the EU Member States, the European Commission tries to counteract those interruptions during the crisis:

“Regardless of the transport mode, the Commission is working with Member States on ways of ensuring economic continuity, guaranteeing the flow of goods and the supply chain, securing essential travel, as well as the functioning of the Internal Market and transport safety.” 7

1.1) Especially affected sectors in Germany

Compared to economic crises or natural disasters of recent decades, the corona crisis´ effects on Germany´s economy are expected to be likely far extensive. Germany´s economic research institute Ifo has released an estimation showing, that due to production loss, short-time work and increasing unemployment and depending on the duration of an economic shutdown -even if only partial-, the economy might diminish by 7.2 to 20.6% of the GDP, which correlates to costs of approximately EUR 255 to 729 billion.”8

As within the whole European Union the service sector and trade sector seem to experience the worst damage. The IFO´s business climate indicator for the service sector, except for food retailers and drugstores, has dropped to the lowest level since the beginning of the index in 2005. In the trade sector the business climate indicator reportedly collapsed. “Expectations tumbled to their lowest level since German reunification.”

In manufacturing, the index fell to its lowest level since August 2009, but had never fallen so deep before since reunification. Many companies have announced plans to curtail production. Apparently, the construction sector was so far not affected too badly, but the prospect for this sector worsened as well.9

While in the beginning of March 2020 the media did not expect too dramatic effects for the German economy, at the end of the same month, the headlines of almost every newspaper were announcing an unavoidable and grave recession, causing the GDP to decline down to 5,4% in the worst case scenario. Every fourth industrial enterprise will reportedly have to react with short-time working and every tenth medium-sized company is threatened by insolvency. 10

 

2) The Necessity of lockdowns

The Corona Virus´ effects on the economy may lead to the question, whether travel restrictions and a lockdown are necessary and every country tried to avoid this measure until the numbers of infection cases rose too high. In Germany the travel restrictions and ban on social activities came into action nationwide between the beginning and the middle of March. However some federal states like Bavaria have stricter restrictions including a curfew. Jena was the first city to make it an obligation to wear face masks when going to supermarkets in the beginning of April.11 And the federal government extended this obligation to all of Germany. From April 27, people are hence obliged to wear face masks when using public transport or entering stores.12

The danger of the new Corona virus and the influenza are often compared and even though the course of the disease seems to be generally milder in European countries, the head of the Robert Koch institute warns, that both viruses could hardly be compared. He states that, the influenza is dangerous, but the disease burden of the new virus is much higher, it spreads faster and leads to a heavier disease process and more cases of death. Since there is no vaccination or effective medicine yet, the fear that the number of ventilators and intensive care beds will not be sufficient is not unfounded.13 Without counteraction, one infected person is said to spread the virus by 2.5. 14

As far as the WHO statistics go, most people infected with COVID-19 virus have mild disease and recover without necessity of intensive care. Approximately 80% of laboratory confirmed patients are said to have had mild to moderate disease, which includes non-pneumonia and pneumonia cases. 13.8% are reported to have severe disease and 6.1% are critical (respiratory failure, septic shock, and/or multiple organ dysfunction/failure).15

So far the numbers might seem to be not concerning, however with a growing infection rate the pressure on the health care system rises until it is threatened to collapse.

According to a study of the Imperial College COVID-19 Response Team, lockdown measures in 1918, when the world faced a similar pandemic virus, reduced the spread and overall mortality rate, compared to places without such lockdown measures as closing public places and institutions and reducing social contacts to a minimum. Combined with contemporary infection research findings, without vaccine or effective medicine, two strategies appear most effective: Either to mitigate the spread and protect those most at risk or to suppress the spread in order to reduce case numbers to low levels and maintain those low levels.

The first option can reduce the peak health care demand, but would only slow the epidemic spread to some degree, which is why the study´s conclusion is ´that optimal mitigation policies (combining home isolation of suspect cases, home quarantine of those living in the same household as suspect cases, and social distancing of the  elderly and others at most risk of severe disease) might reduce peak healthcare demand by 2/3 and deaths by half. However, the resulting mitigated epidemic would still likely result in hundreds of thousands of deaths and health systems (most notably intensive care units) being overwhelmed many times over.´

By calculating the infection spread and infection fatality rate for Great Britain, without mitigation measures, the study predicts an infection rate of 85% and 510000 people to die of Covid-19, the rising mortality rate due to the collapsing health care system yet being to add. While numbers would vary, the study results can be applied to Germany and other high-income countries with well-functioning health care system.

This figure shows how much combining mitigating and suppressing measures can reduce the pressure on the health care system. 16

At the moment the restrictions in Germany shall be kept effective until at least May 10th. (Decided on April 30, 2020) 17 However, since it seems likely that the infection rate would rise again after lifting the restrictions, the research team of the Imperial College suggests that the restrictions should stay effective until a sufficient stock of vaccines is available and that might take 18 months or even longer.18

3) How the German Government counteracts economic loss

When thinking of the effects of the Corona crisis, it is evident, that the economic damage is being very much affected by the potential loss of small- and medium sized enterprises (SMEs). In a letter addressed to the Federal Minister of Economics and Energy, the HDE (German Trade Association) fears that especially retail companies and shops won’t be able to cope with the loss of revenue and ongoing rental costs.19

To protect SMEs or self-employed that would be forced to close their business for various reasons, such as not being able to pay their employees anymore and not being able to keep up the production or supply chain, subsidies and loans were made available on various levels.

Every state provides its own economic emergency aid for SMEs and self-employed persons, that varies from €3000 up to €60.000, depending on the size of the company. The amount of financial support varies very strongly from state to state, but in addition to the state’s efforts the federal government provides further measures.20

It decided on a supplementary budget for medical and economical protection measures, as well as research projects. Within the total expenditure of EUR 484.5 billion instead of EUR 362 billion, EUR 50 billion are said to be used for the support of small businesses. This is intended to provide bridging aid for "solo self-employed persons", small businesses and small entrepreneurs when their existence is threatened without assistance.

In order to secure the existence of "solo self-employed persons", among others, the funds for unemployment benefit II and basic security were increased by a total of approximately 7.7 billion euros. Provisions were increased by about 5.9 billion euros for possible claims in the area of warranties and guarantees, which may arise in particular as a result of economic upheavals.

In addition, the Federal Government has agreed on the establishment of a protective shield for employees and companies which, among other things, makes the short-time work allowance more flexible and improves liquidity for companies. Through fiscal measures such as the granting of deferments, through new measures at the Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation KfW) and in the area of guarantees, KfW was enabled to provide the necessary guarantees to implement these programs. 21

Apart from loans that must be paid back, an emergency aid for self-employed persons, freelancers and small businesses was established and grants a subsidy ranging from €9000 up to €15000, depending on the number of employees, paid for three months. This subsidy does not have to be repaid and thus lightens the burden of SMEs and self-employed persons.

Overall the protective shield for employees, self-employed persons and companies is the largest aid package in the history of the Federal Republic of Germany. The total volume of measures affecting the budget amounts to EUR 353.3 billion and the total volume of guarantees amounts to EUR 819.7 billion.22

The Economic Stabilization Fund provides €100 billion capital measures, €400 billion for guarantees, €100 billion participation in refinancing KfW programs, KfW loans for SMEs ranging from €1 billion up to an unlimited sum. Tax prepayments are reduced and deferral or enforcement measures are payable later. By means of short-time allowance the companies receive a reimbursement of 1 year's worth social security payments if 10% of employees are on short-time work and workers receive 60% of their net salary from the Federal Labour Office.23

4) Governmental Support for Citizens

The pandemic is putting German citizens to a severe test, not only financially but also psychologically. In addition, in many a household childcare needs to be managed in parallel with work and there is also a legal dimension where there are questions and concerns. One of the greatest fears of not being able to pay the rent due to corona-related loss of earnings and thus losing one's home was answered by the federal government with a protective measure that suspends rent cancellations until the end of June.

Another legal point is the continuation of companies that are in economic difficulties or have become insolvent as a result of the Corona pandemic. Usually an insolvent company must file for insolvency immediately, but this obligation was suspended until the end of September 2020.

Simplifications will be introduced for cooperatives, companies, associations and foundations which will enable the legal forms concerned to take the necessary decisions and remain capable of acting even if restrictions on the possibilities of assembly continue to exist.24

The relevant ministries of the Federal Government have set up information hotlines for companies and citizens to answer economic, legal and medical questions.25 The ministry of family affairs for example, provides parents with information regarding childcare during the corona crisis. While in general schools and nursery facilities are closed until further notice, in most cases, parents with system-relevant professions - such as medical care, police or critical infrastructure - are entitled to "emergency care" for their children, that may vary in method from state to state. Parents that do not execute a system-relevant profession can receive 67% of their net income for six weeks if if they can’t continue to work. In case the company applied for short-work, parents can receive a higher amount of continued wage payment, than workers without children receive.26

Social distancing and the worries related to the financial and medical situation are a strain to the citizens, which is why the statutory health insurance funds and the Federal Association of Statutory Health Insurance Physicians have decided that psychotherapies can be continued without restriction using special video software that ensures data protection.27

Various foundations, such as the German Depression Aid foundation, provide information on their websites on how to create a structured daily routine despite quarantine or home office and have also set up hotlines where those affected can talk about their fears and worries outside of psychotherapy.28

5) Corona-related behavior tendencies towards foreign citizens

Speaking of the social and psychological dimension of the crisis, some behavior tendencies that are either related to fear or even to xenophobia can be witnessed in the society since the outbreak of covid-19 in Germany. The Federal Anti-Discrimination Agency, an independent contact point for people affected by discrimination, that offers legal advice for those who have experienced discrimination -for example due to their ethnic origin-, had received many claims of citizens in February. Especially Asian looking citizens reported to have been discriminated against lately, no matter their true origin or relation to China. Reportedly a Chinese patient was denied a medical examination, even though he had symptoms completely different from Corona. In trains people refrained from sitting next to Asian looking persons and many more of such cases were reported to the agency. 29

Newspapers are reporting that Asian citizens continue to face discrimination and are even being threatened or attacked physically. In March Chinese Music students were denied the entrance examination at a music high school in Berlin, without check whether the students have recently been in China or other risk areas.30

Amnesty International reports that the mixing of fear with already existing racist stereotypes can also be observed in the media. For example, in early February, the Bild newspapers asked whether one could still eat fortune-cookies or accept packages from China. The news magazine Der Spiegel showed on its cover picture in February a person in red protective clothing, completely masked with a respiratory mask and goggles, and the title: "Corona virus. Made in China. When globalization becomes a deadly danger". Both examples not only suggest that the entire Chinese population was the cause and spread of the virus. "Made in China" also seems to imply that the virus was "manufactured" on purpose and "exported" in China - an argument that is also found in colonial-racist conspiracy theories. In their article Amnesty International urges people to react to and object discriminating statements in solidarity.31

On the internet the victims of such cases of discrimination and racism aligned via twitter by posting their experiences and responses under the hashtag #IchBinKeinVirus (the English equivalent #Iamnotavirus relates to American and world-wide incidents) to rase awareness and call out to stop such behavior.32

As already mentioned, the federal anti-discrimination office of Germany can be contacted not only to report such cases, but also to receive initial legal advice on how to react juristically to discrimination and incidents. Depending on the case, victims can receive compensation for damage, damage to their reputation or to personal suffering.28

Apart from the federal agency, victims of discrimination in relation to the corona virus and discrimination in general can contact the anti-discrimination association Germany, an alliance of independent advisory bodies and receive personal and legal advice.33

Not too long before the pandemic started in Germany, the terroristic incident in Hanau in the state of Hessia, shew that in Germany there are racist and right-wing extremistic tendencies that might eventually result in violent acts. On March 21, politicians remembered the victims of that incident and realized, that the discrimination against Asian looking citizens only adds to that overall tendency which shall be met by stronger countermeasures, the politicians are currently discussing about.34

The Council of Europe lately released a report on measures against racism and right-wing extremism in which for Germany it demands more intensive prevention and combating of right-wing extremism and racism, more effective action against hate speech on the Internet and an expanded mandate and additional powers for the federal anti-discrimination office.35

In summary the Corona pandemic has already causes considerable havoc on the economy, the social life, the health care system and the political climate in Germany. It is obvious that the extent of damage to the economy depends primarily on the duration of the restrictions on public life and closures of workplaces. At the same time, it is also understandable, that measures should not be loosened too soon to prevent a sudden and severe increase in new infections. In this respect, the health care system and the economy are in a conflict of interests in which actions need to be considered carefully. After all, a renewed increase in the number of infections and a resulting collapse of the health system could have even more serious consequences for the economy.

Once the virus control measures have been lifted, the revival of the economy will depend above all on how many small and medium-sized enterprises will have been saved and how quickly the accustomed production chains and trade partnerships can be resumed.

Sources

1  BBC; Coronavirus: Stock bounces as volatility continues (last viewed on April 30, 2020)
2  BBC; Coronavirus: A visual guide to the economic impact (last viewed on April 30, 2020)
3  Statista; Coronavirus: OECD slashes Forecast for World Economy (last viewed on April 30, 2020)
4  IATA; COVID-19 Updated Impact Assessment (last viewed on April 30, 2020)
5  IATA; Air Passenger Market Analysis, March 2020 (last viewed on April 30, 2020)
6  Statista; COVID-19 Impact: Restaurant Industry Collapses Due to Widespread Shutdowns (last viewed on April 30, 2020)
7  European Commission; Coordinated economic response to the COVID-19 Outbreak (Page 4, (last viewed on April 30, 2020))
8  IFO Institute; Corona will cost Germany hundreds of billions of euros (last viewed on April 30, 2020)
9  IFO Institute; Business climate index collapses (MARCH 2020) (last viewed on April 30, 2020)
10  ZEIT ONLINE; Wirtschaftsweise halten schwere Rezesssion für unvermeidbar (last viewed on April 30, 2020)
11  Frankfurter Rundschau; Coronavirus in Deutschland: Erste Großstadt führt Maskenpflicht ein (last viewed on April 30, 2020)
12 Bundesregierung; Maskenpflicht in ganz Deutschland (last viewed on April 30, 2020)
13  Merkur; Coronavirus und Grippe: Das sind die Unterschiede – RKI mit neuer Einschätzung (last viewed on April 30, 2020)
14  RKI; Coronavirus SARS-CoV-2 (last viewed on April 30, 2020)
15  Report of WHO-China Joint Mission on Coronavirus Disease 2019 (COVID-19) (Page 12, last viewed on April 30, 2020)
16  Imperial College COVID-19 Response Team; Report 9: Impact of non-pharmaceuticall interventions (NPIs) to reduce COVID-19 mortality and health care demand (Page 1, 4, 8 (last viewed on April 30, 2020))
17 Bundesregierung; Kontaktbeschränkungen und erste Lockerungen (last viewed on April 30, 2020)
18  Imperial College COVID-19 Response Team; Report 9: Impact of non-pharmaceuticall interventions (NPIs) to reduce COVID-19 mortality and health care demand (page 15 (last viewed on April 30, 2020))
19  HDE; Hilfe für den Einzelhandel (last viewed on April 30, 2020)
20  Bundesfinanzministerium; Corona Soforthilfe: Übersicht der zuständigen Behörden oder Stellen in den Ländern (last viewed on April 30, 2020)
21  Bundesregierung; Nachtragshaushalt 2020 (last viewed on April 30, 2020)
22 Bundesfinanzministerium; Mit aller Kraft gegen die Corona-Krise: Corona-Schutzschild (last viewed on April 30, 2020)
23 Bundesfinanzministerium; Mit aller Kraft gegen die Corona-Krise: Schutzschild für Deutschland (last viewed on April 30, 2020)
24  Bundesregierung; Mehr Rechtssicherheit in Krisenzeiten (last viewed on April 30, 2020)
25  Bundesgesundheitsministerium; Hotlines zum Coronavirus (last viewed on April 30, 2020)
26  Bundesministerium für Familie, Senioren, Frauen und Jugend; Finanzielle Unterstützung für Familien in der Corona-Zeit (last viewed on April 30, 2020)
27  ZEIT ONLINE; Psychisch krank in Quarantäne (last viewed on April 30, 2020)
28  Deutsche Depressions Hilfe; Hinweise an Depression erkrankte Menschen während der Corona-Krise (last viewed on April 30, 2020)
29  Antidiskriminierungsstelle des Bundes; Coronavirus: Gehäufte Anfragen wegen Diskriminierung bei der Antidiskriminierungsstelle des Bundes (last viewed on April 30, 2020)
30  ZEIT ONLINE; Rassismus: Ich.Bin.Kein.Virus. (last viewed on April 30, 2020)
31  Amnesty International; Coronavirus: Keine Rechtfertigung für Rassismus (last viewed on April 30, 2020)
32  Twitter; #ichbinkeinvirus (last viewed on April 30, 2020)
33  Antidiskriminierungsverband Deutschland; Diskriminierung benennen, Betroffene unterstützen, Gleichbehandlung umsetzen (last viewed on April 30, 2020)
34  Frankfurter Rundschau; Kampf gegen Rassismus – gerade in Corona-Zeiten (last viewed on April 30, 2020)
35  Antidiskriminierungsstelle des Bundes; Europarats-Bericht: Deutschland muss mehr gegen Rassismus tun/Antidiskriminierungsstelle des Bundes unterstützt Empfehlungen (last viewed on April 30, 2020)

Veröffentlicht in Business.