Despite the (partial) lockdown: the economy grew faster than expected at the end of 2020

Wednesday, February 24, 2021

Despite the (partial) lockdown
Economy grew faster than expected at the end of 2020

Although the country is only partially and then completely in lockdown towards the end of 2020, gross domestic product increased slightly in the last quarter. The reason: In the export business and in the construction industry, things are going so well that declines in other areas are being offset.

Germany got through the Corona crisis year 2020 a little better than initially assumed. Despite the second lockdown, the gross domestic product (GDP) rose by 0.3 percent in the fourth quarter compared to the previous quarter, according to the Federal Statistical Office. Initially, the statisticians had calculated an increase of only 0.1 percent. Over the year as a whole, the German economy shrank by 4.9 percent instead of the previously assumed 5.0 percent.

The federal, state, local and social security sectors spent 139.6 billion more than they earned last year. In an initial calculation, the Wiesbaden authority assumed a minus of 158.2 billion euros. In relation to total economic output, the budget deficit was 4.2 percent. That was the second highest minus since German unification, only exceeded by the record deficit of 1995. At that time, the trust's debts were taken over into the state budget.

Expenditures for aid packages worth billions to support the economy in the crisis contrasted with falling revenues last year. Tax revenue fell significantly, partly because VAT was cut for six months from July 1st to stimulate private consumption. The federal government showed the greatest minus at 86.6 billion euros. The deficit of the social security amounted to 33.7 billion euros, that of the federal states to 18.0 billion euros. The municipalities recorded a comparatively small minus of 1.3 billion euros, also due to higher transfers from the federal and state governments.

Germany does not face problems with Brussels because of the deficit. Due to the Corona crisis, the states of the European Union suspended the rules of the Stability and Growth Pact for the first time, according to which the budget deficit must not exceed three percent and the total debt must not exceed 60 percent of the gross domestic product. Goods exports and construction investments supported the development in the fourth quarter, while private consumer spending fell by 3.3 percent compared to the third quarter of 2020. In the first Corona wave in spring, the German economy recorded a historic slump, followed by a comeback in the summer. The second lockdown then dampened the recovery.

In a year-on-year comparison, the crisis left its mark. GDP declined by 2.7 percent at the end of 2020 compared to the fourth quarter of 2019. Economists and the federal government expect the German economy to regain momentum this year. In the first quarter, however, economic output should shrink due to the lockdown that was extended until March 7th. For the year as a whole, Berlin recently expected economic growth of 3 percent. In the autumn, the federal government had assumed an increase of 4.4 percent.

Economists see risks in a possible third corona wave. "You can set up all kinds of plans. But if a third wave comes, these will be obsolete," said the chairman of the "Wirtschaftsweise", Lars Feld.