Bundesbank: Germany’s Economy Should Expand ‘Very Sharply’ in 3Q

17 August, 2020

By David Barwick – FRANKFURT (EconoStream) – The German economy should show very strong growth in the third quarter, though without reaching a pace equal to that of the preceding contraction, the Bundesbank said on Monday.

In its latest monthly bulletin, the German central bank also expressed qualified optimism about economic developments this quarter at the level of the Eurozone.

‘Following the sharp slump in the first half of the year, the German economy should grow very strongly in the summer quarter of 2020’, the bulletin said. As of today, according to the report, ‘the clear and broad-based recovery in macroeconomic performance, which began after the low point in April, will continue.’

The Bundesbank cited industry orders, which it said had ‘recently improved considerably’, along with a ‘sharp rise in short-term export and production expectations’ with respect to manufacturing. ‘The mood also improved significantly in other areas of the economy’, the Bundesbank added.

‘However, the economy is likely to recover much more slowly than it shrank during the extremely abrupt and deep crash previously’, the bulletin cautioned. Germany would thus not come close to attaining pre-crisis output levels even beyond 3Q, it said.

A major impediment to a V-shaped recovery in the Eurozone’s largest economy is the ongoing pandemic in many countries and the consequent impact on foreign demand for German goods, the bulletin said. Uncertainty is additionally restraining investment, it said, calling this factor ‘likely to stand in the way of a comprehensive recovery in demand for German industrial products’ until the challenge posed by the virus is resolved medically.

The Bundesbank deemed the euro area economy as a whole likely to show a sharp recovery in 3Q, but as in the case of Germany, this would not compensate for the entirety of the foregoing downturn. ‘Rather, it is even to be expected that the recovery will proceed much more slowly’ than in 2Q, given the damping effect of voluntary and involuntary precautions in the face of the virus, the bulletin said. Moreover, it added, ‘there are still no signs of comprehensive improvement in the international environment’.

The debt incurred by the German government to mitigate the fallout from the pandemic ‘is manageable from the current perspective, but the risks and future challenges must be kept in mind’, the bulletin admonished.

Confidence in Germany’s fiscal position can also be inferred from the low interest rates applied even to long maturities, the Bundesbank observed. ‘However, fiscal policy should not count on such low interest rates being permanent’, it said. It is also possible, the central bank noted, that the German economy will ultimately emerge from the crisis on a slower growth path, with a corresponding burden on public finances.