Germany's economy slumped 10% in second quarter as virus restrictions hit businesses

Output fell to a record as exports, consumer spending and investment declined

Germany's economy shrank as movement restrictions amid the pandemic hit business activity. EPA

Germany’s economy plunged into a record slump in the second quarter, when virus restrictions slammed businesses and households across Europe, destroying jobs and prompting an unprecedented policy response.

Output fell 10.1 per cent, the most since the quarterly series began in 1970, with declines in exports, consumer spending and investment. While survey indicators signal a recent return to growth, higher unemployment remains a risk, which would threaten the recovery.

The pace of the rebound will rely in part on the effectiveness of the government’s €130 billion ($153bn/Dh560bn) stimulus approved in June and how fast can demand for German exports return to pre-pandemic levels. But with concerns over new outbreaks of the virus, the outlook is uncertain, even after an unprecedented European Union fiscal deal championed by Germany and France.

A similar picture is playing out across the euro-area, which may have suffered a 12 per cent contraction in the quarter. Governments across the region have stretched their budgets on health and welfare spending, and the European Central Bank launched an emergency bond-buying programme to get the economy through the crisis.

Job cuts remain a major risk for the outlook. Germany’s national airline Deutsche Lufthansa is slashing thousands of jobs, and car maker Daimler is reducing hours for some workers for a year. Figures due Friday may show even more severe slumps across Southern Europe. That partly reflects tougher lockdowns and damage to the crucial tourism sector in Italy and Spain.

The euro was little changed after the data, trading at 1.1757 per dollar as of 10:19am in Frankfurt (12.19pm in the UAE). German bonds held on to their gains, keeping the yield on 10-year securities down 2 basis points to minus 0.52 per cent.

Germany had less severe containment measures at the height of the health crisis, and was able to utilise long-established support measures that allowed companies to keep millions of staff on payrolls, and prevent a jump in joblessness.

“The labour market is still under pressure due to the coronavirus pandemic, even if the German economy is on a recovery path,” Daniel Terzenbach, regional board of the Federal Employment Agency, said in a separate release on Thursday.

The country’s fiscal situation was also stronger, allowing the government to mobilise trillions of euros in various rounds of stimulus to help struggling businesses and households with loan guarantees, equity injections, and additional liquidity.

A detailed breakdown of what drove the second-quarter slump is due on August 25. Inflation data is due later on Thursday, with prices forecast to have gained only 0.1 per cent in July from a year ago.