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Good times ahead for German economy

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Henrik Böhme
December 25, 2020

The end of the coronavirus crisis is in sight, although patience and discipline are required to get there. DW's Henrik Böhme is confident that the German economy will shift up a gear or two come 2021.

A worker at Dürr testing a painting robot
A worker at Dürr testing a painting robot Image: dpa/picture alliance

Many have said it before, but it's never been as true as it is now: It has to get worse before it gets better. This long, dark winter will be quite a challenge for us pandemic-hit Germans.

We have to refrain from a lot of things; we need to be patient and considerate of others, and at the same time we're called upon to stay confident. There are reasons, though, why we should raise our heads and look to the future without fear. But first, let's take a brief look back.

During the first lockdown in spring of this year whole factories were shut down, meaning the production of machines and cars ground to a halt. Big and small stores were shuttered. There was no lack of gloomy forecasts, with some prophets predicting a 20% drop in GDP for the year.

At the end of the day, we'll most likely log a 5% contraction for 2020 as a result of the COVID-induced standstill. That's a lot, but we'll manage. In summer, the German economy showed everyone what it is capable of: It finished the third quarter with a growth rate exceeding 8%. That was a truly unparalleled surge.

DW's Henrik Böhme
DW's Henrik Böhme

Who's going to foot the bill?

In a likewise historic development, the government has been spending unprecedented sums of aid money, with billions of euros coming from the otherwise thrifty Finance Minister Olaf Scholz.

True, the aid has not yet reached all of those who need it most, notably small entrepreneurs and self-employed people, and that's because the software to handle their applications is not yet working as it should.

By and large, though, you can't say the government hasn't tried to provide quick help. Now we're faced with €180 billion ($219 billion) in fresh borrowing to make the federal budget work next year. Looking at this figure can make you feel dizzy. And who's going to pay for all this?

However, that's a question you're inclined to ask on various occasions these days. Just think of the €1.8 trillion European Central Bank's emergency bond-buying program. Add to this the €1.8 trillion financial aid package that the European Union approved earlier this month following tough negotiations.

Soon shopping streets in Germany will fill up again like here  Brunswick, Lower Saxony
Shopping streets in Germany will once again fill up like here in 2017Image: imago/Schöning

As early as this summer, aid packages globally amounted to at least $15 trillion, making global debt levels rise at lightning speed. According to the Institute of International Finance, a banking lobby association, global debt equals $275 trillion including liabilities of companies and lenders. By comparison, German economic output in 2019 amounted to $4.2 trillion.

Back to a balanced budget

Of course, we're talking about mind-boggling figures. But was there really an alternative? Let's not forget that during the Great Depression of the 1930s, banks and governments held back on financial aid, thus triggering catastrophic consequences.

That's different today. During the crisis in Asia toward the end of the 1990s and in the years following the onset of the global financial crisis in 2008, comprehensive aid packages were initiated to prevent capital flows from drying up.

Naturally, the money will have to flow back into state coffers at some stage. A brief look back shows us that following the global financial crisis, the German economy expanded for almost a decade, boosting state revenues through tax income.

That increase in revenues — coupled with a policy of frugal economic management — has enabled the German finance minister to pull out the big guns in the current pandemic. It's time to correct a misconception the author of this article himself once held as an outright opponent of a balanced budget policy. Experience tells me, though, that saving something for a rainy day while the economy is booming makes sense and is no bad recipe to brace for the future.

Will things get better next year? I believe so. The first COVID-19 vaccines have been authorized, meaning the pandemic will become less frightening in the foreseeable future. People will be able and will want to travel again and buy cars.

This year, Germans spent between €70 billion and €100 billion less than in ordinary years. That money will hopefully flow back into consumption soon and crank up the economy.

Some dents will remain

Exports are expected to pick up considerably. Should the global economy really expand by 4.2% next year as forecast by the OECD, some of that growth will no doubt be generated in the German engineering and automotive sectors and a couple of other industries.

As companies have been cutting back on investments over the past two years, there's a lot of catching up to do. And let's not forget that the many billions from the various government aid programs have to be spent on a number of infrastructure projects including the expansion of fiber-optic high-speed internet, the improvement of the road and rail networks, and digitization.

Sure, not everything will be rosy. Not everyone in the hospitality sector and not every small shop owner will survive the pandemic. The number of corporate insolvencies will increase sharply once special temporary regulations to head off bankruptcies expire.

Many a firm that's currently keeping afloat solely because of government aid is bound to go under. Let's hope that as few people as possible will lose their jobs — and find employment elsewhere quickly.

Be that as it may, 2020 was a unique year by many standards, and next year won't be any less exciting, but hopefully one with a better ending.

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Henrik Böhme Business editor focusing on international trade, cars, and finance@Henrik58