Germany: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strong industrial base (24% of GDP, 2019)
- Low structural unemployment; well-developed apprenticeship system
- Importance of family-owned exporting SMEs (Mittelstand)
- Relatively low private household debt (96% of disposable income, 2019)
- Institutional system promoting representativeness
- Decline in the working population from 2020 onwards, despite immigration
- Low bank profitability
- Prominence of the automotive and mechanical industries, particularly in exports (33% of GDP in 2019)
- Capacity constraints, insufficient investment (especially in internet accessibility), and venture capital limit productivity gains
- Eastern Länder still lagging behind, although the gap is closing
Bumpy recovery after a dynamic recession
For 2021, a recovery is expected after a historic recession in 2020. However, depending on the development of the COVID-19 pandemic, this recovery could turn out as bumpy. This development had already been seen in 2020. After the virus hit Germany in the spring, the government reacted fast and implemented a lockdown for around 6 weeks: public life came to a standstill and non-essential shops were closed. These measures helped to contain the number of COVID-19 cases at a modest level. Nevertheless, in Q2 2020, the strict hygiene rules induced the sharpest quarterly economic contraction in the last 70 years, as not only private consumption collapsed, but so did investments, because numerous plants had to shut down their production due to health reasons. Concomitantly, exports crashed because of the missing demand from Germany’s main export destinations. In the summer of 2020, the economy recovered fast thanks to the lifting of restrictions. In order to support private consumption, the VAT was reduced between July and December (by 3pp.). Most people spent their holidays in Germany, which helped the domestic tourism industry (Germany has a strong tourism deficit in normal times). However, a second COVID-19 wave that started in the autumn turned out much stronger and resulted in another lockdown (which was imposed in early November). This stopped the economic recovery abruptly. In 2021, a moderate recovery is expected, led by private consumption. The purchasing power will be higher, as unemployment should further decrease from its high levels. Moreover, more people should leave the furlough status and could return to their jobs. Many people will have a higher net-income as the income tax credit will be extended by almost EUR 300 and the solidarity surcharge (a subsidy for the Eastern Länder, 5.5% of the income tax) is abolished for most people. However, in 2021, wage growth will be lower than in the last years (1.6% after 2.0% in 2020) and the energy costs will increase (the government is introducing prices for CO2-emissions for fuels and gas). The economic recovery should be also backed by higher foreign demand for German exports from the main destinations i.e. China, the Eurozone, and the U.S. Governmental aid packages will remain a large source of support. Several of the measures introduced in 2020 will continue in 2021, such as the furlough scheme (until the end of 2021). EUR 40 billion (1.2% of GDP) of bridging aid are planned, and almost EUR 69 billion (2.1% of GDP) for investments and public credit-programs will remain in 2021. Additional support should come from the ECB, which should extend its asset purchase programs (APP with the normal EUR 20 billion per month and PEPP by an additional volume of around EUR 680 billion) until the end of 2021, alongside another extension of its targeted long-term refinancing operations (T-LTROs).
Another year of a public deficit
2021 will be the second year with a public deficit, after nine years of surpluses, as expenditures will remain high and tax revenues will fall. Accordingly, the public debt ratio will remain above the Maastricht target of 60% of GDP. Germany’s current account balance, however, should change only mildly. In 2020, the decrease in the goods trade surplus was partly leveled out by a less important services trade deficit and higher incomes from investments abroad. In 2021, the goods trade balance should improve somewhat, while the services deficit will probably remain muted, which should, in total, increase the current account surplus again.
COVID-19 gives the government a confidence boost
Chancellor Angela Merkel (CDU) is leading the third consecutive Grand Coalition between Conservatives (CDU/CSU) and the Social Democrats (SPD). The half-heartedness in both parties for this coalition led to the change in their leadership and remained a problematic issue even afterward. However, Chancellor Merkel regained support with her work to fight COVID-19 and the support rate of the Conservatives increased from around 27% in late February 2020 to 37% at the end of the year. This came at the expense of the Greens (18% in late 2020 down from 22% before COVID-19, remained in 2nd place) and the right-wing AfD (9% in late 2020, down from 14% before COVID-19). While the Grand Coalition is expected to remain until the next general election in September 2021, chances are high that the first conservative-green coalition on the federal level could be formed after the election. Angela Merkel, however, will not candidate for the Chancellorship anymore.