The Current Economic Situation in Germany Deutsche Bundesbank Monthly Report February 2021 6

Deutsche Bundesbank Monthly Report February 2021 5

The current economic situation in Germany Deutsche Bundesbank Monthly Report February 2021 6

Overview

Resurgence of pandemic demic is combatted successfully. Efforts to ac- is slowing economic recovery celerate the production and distribution of vac- worldwide cines around the world are therefore particularly important, and not merely for humanitarian Global eco- The exceptionally rapid global economic recov- reasons. nomic recovery ery, which had allowed a sizeable part of the lost momentum in Q4 severe downturn caused by the pandemic to The international financial markets were shaped Optimistic view already be recouped over the summer months, by a bifurcation during the final quarter of starting to assert itself in the lost considerable momentum in the fourth 2020 and first quarter of 2021: while the avail- financial quarter. This was due mainly to new waves of ability of vaccines strengthened market partici- markets infections across much of the world. The con- pants’ optimism, the renewed rise in infections tainment measures were tightened again in and containment measures were perceived as a Europe, in particular, which placed a marked drag on growth. Within the euro area, the strain on the region’s economies. Economic Governing Council of the ECB responded to the output in the euro area fell by 0.6% on the second wave of infections with a decision to quarter in the fourth quarter of 2020. In the increase the envelope of the pandemic emer- United States, growth in real gross domestic gency purchase programme (PEPP) and to ex- product (GDP) dropped off significantly. In tend the horizon for net purchases under the China, meanwhile, which has not yet experi- programme. This helped bring down the yields enced a new wave of the pandemic, growth on sovereign bonds of euro area countries with remained brisk. China also made a significant relatively low credit ratings. Average yields on contribution to the ongoing global industrial euro area corporate bonds also continued to recovery, with industry visibly decoupling from decline, hitting new lows in January. By con- developments in the services sector. trast, yields on highly rated European sovereign bonds picked up, mainly due to the interest Economic devel- With infection rates still high and containment rate linkage with the United States, where opments in 2021 measures having been further tightened in yields on US Treasuries rose sharply. Market depend on how the pandemic many places, the global economy looks set to participants now see a greater likelihood of the unfolds get off to a weak start to 2021. However, the incoming US administration undertaking sub- rapid development of vaccines at least means stantial deficit spending. An increase in market- that vaccination campaigns are now under way based measures of long-term inflation expect- in many countries. There are consequently ations, which was observed in numerous coun- hopes that it will be possible to ease restric- tries, was also particularly pronounced in the tions noticeably over the next few months. United States. The combined impact of the However, there are also potential risks if new aforementioned developments sent global strains of the virus spread. Nonetheless, other equity markets sharply higher. Financial market factors have brought about a marked brighten- participants upgraded their earnings outlook, ing of the risk assessment as of late. A trade particularly for US enterprises. In foreign ex- deal was struck between the European Union change markets, hopes that the vaccinations and the United Kingdom. Moreover, a number would help global activity bounce back far of countries look set to introduce additional, more quickly than previously expected damp- large-scale fiscal stimulus measures, which ened demand for currencies regarded as rela- could further fuel global economic activity. tively safe havens. This meant that the US dol- Nonetheless, a sustainable global economic re- lar and yen lost value in effective terms. The covery can still only be achieved if the pan- Deutsche Bundesbank Monthly Report February 2021 7

euro also depreciated slightly on a weighted going asset purchases again fostered monetary average. growth. Second, the commercial banks significantly stepped up their securitised lending to Monetary pol- At its December 2020 monetary policy meet- private issuers. Third, loans to the domestic pri- icy: ECB Govern- ing, the ECB Governing Council recalibrated its vate sector saw major growth overall, even ing Council recalibrates monetary policy measures in view of the eco- though non-financial corporations sought monetary policy measures nomic consequences of the resurgence in fewer loans than in the preceding quarter. The coronavirus infections. In particular, it increased banks participating in the Bank Lending Survey the envelope for the PEPP by €500 billion to a (BLS) also reported a drop in demand for loans total of €1,850 billion. If favourable financing to enterprises. At the same time, though, they conditions can be maintained with overall reported tightening their credit standards in all lower purchase volumes, the decision states loan categories surveyed, particularly on ac- that the envelope need not be used in full. At count of elevated risk related to the pandemic. the same time, the Governing Council extended the horizon for net purchases under the The economic recovery in Germany was Second wave PEPP to at least the end of March 2022. In add- brought to a standstill in the final quarter of of pandemic thwarted ition, it recalibrated the conditions of the third 2020. According to the Federal Statistical Of- Germany’s economic recovery series of targeted longer-term refinancing op- fice’s flash estimate, real GDP was up by a mar- at end of 2020 erations (TLTRO-III) again and will offer three ginal 0.1% after seasonal and calendar adjust- additional operations in 2021. It will, moreover, ment. This means that economic activity was offer four additional pandemic emergency still almost 4% down on the pre-crisis level of longer-term refinancing operations (PELTROs) the fourth quarter of 2019. The catch-up was in 2021. The Governing Council said that it halted by the resurgent infection rates and the would continue conducting regular lending op- associated gradual tightening of containment erations as fixed rate tender procedures with measures. These measures primarily targeted full allotment at the prevailing conditions for as contact-intensive areas such as recreational long as necessary. In addition, it extended the and cultural services, hotel and restaurant ser- collateral easing measures up until June 2022 vices, and bricks-and-mortar retail outlets, lead- and the Eurosystem repo facility for central ing them to report considerable losses in some banks (EUREP) and all temporary swap and cases. By contrast, many sectors that were not repo lines with non-euro area central banks directly affected by the measures continued to until March 2022. recover. The industrial sector, in particular, stepped up production substantially. Monetary In the final quarter of the year, monetary dynamics still growth was also shaped by the impact of the The construction sector also increased its value Sectors hit by highly acceler- containment ated due to coronavirus pandemic and economic policy ac- added. It has so far remained largely unscathed measures to coronavirus varying degrees pandemic tion taken in response to it. The annual growth by the pandemic. On the expenditure side, the rate of the broad monetary aggregate M3 tightened restrictions had a noticeable effect climbed to 12.3% by end-December, more on household consumption especially, which is than double its rate at the end of the previous likely to have shrunk considerably despite the year. Given the persistently high level of uncer- strong increase in car purchases. Exports re- tainty about how the pandemic will unfold, mained on an upward trajectory, by contrast. precautionary considerations still dominated Economic indicators are also signalling that en- for households and enterprises, with highly li- terprises are likely to have increased their in- quid overnight deposits, in particular, recording vestment in machinery and equipment as well. substantial net growth. On the counterparts side, this development was driven by three fac- These developments are also feeding through tors in particular. First, the Eurosystem’s on- to bank lending, which was more dynamic Deutsche Bundesbank Monthly Report February 2021 8

Fresh uptick in overall than it had been in the preceding quar- increased again in the fourth quarter owing to German banks’ ter. Loans to households once again made the a decline in short-time work. Even so, wage loans to domestic private sector largest contribution to growth; demand for drift (i.e. the difference between the growth loans to households for house purchase con- rates of negotiated and actual wages) is likely tinued to rise. Loans to non-financial corpor- to have been distinctly negative, as in the two ations also saw distinct growth in the fourth preceding quarters. The wage demands of the quarter. Heightened uncertainty about future trade unions in this year’s major wage round economic developments and the resultant re- currently amount to 4% to 6% for a period of luctance to invest did, in and of themselves, 12 months and continue to reflect the ongoing dampen German enterprises’ demand for bank strains of the pandemic. loans. However, not all economic sectors were equally affected by this; in particular, financing In the final quarter of 2020, consumer prices Inflation in Q4 needs remained high among enterprises in the (HICP) remained constant on the quarter in 2020 clearly dampened by loan-intensive construction and real estate sec- seasonally adjusted terms after falling markedly temporary VAT cut and energy tors. In addition, the enterprises affected by the in the third quarter owing to the temporary re- prices, but up lockdown again saw an increasing need for duction in value added tax (VAT). The tempor- strongly in funds, partly because of delays in the payment ary VAT cut and energy prices continued to January of government bridging aid. Respondents to have a significant dampening effect year on the BLS tightened their credit standards and year. At -0.6%, inflation in the final quarter of credit conditions on balance for loans to enter- 2020 was even slightly lower than in the previ- prises. ous quarter (-0.2%). The inflation rate exclud- ing energy and food was likewise in slightly Labour market The labour market proved relatively robust in negative territory (-0.1%, after 0.5%). In Janu- robust the face of tightened measures taken during ary 2021, consumer prices surged upwards. In- the fourth quarter to contain the pandemic. flation rose exceptionally sharply, from -0.7% in Based on the data available so far, the level of December to 1.6%. The core rate also picked employment remained more or less constant up significantly (from -0.1% to 2.0%). The in- compared with the third quarter. However, this crease was thus even stronger than had been may mask a significant bifurcation depending expected as a result of the reintroduction of on the form of employment and economic sec- the regular VAT rates and the implementation tor. This heterogeneity also applies to take-up of the measures contained in the climate pack- of short-time working arrangements. Overall, age. This is likely to be explained by extensive the number of people in short-time work rose updates to the expenditure weights underlying again at last report, but on the other hand, un- the HICP. employment fell fairly significantly up to Janu- ary, despite the restrictions caused by the pan- The increased burdens caused by the strict con- German eco- demic. The expanded contact restriction meas- tainment measures in place until at least early nomic output likely to contract ures in place since mid-December dampened March are likely to hamper aggregate output in markedly in Q1 2021 but return expectations and the outlook for the next few the first quarter of 2021. However, there is no to significantly months, however. reason to fear that economic activity will sink higher level to the lows recorded during the lockdown in from Q2 Negotiated pay The pandemic is continuing to shape wage de- the second quarter of 2020. First of all, this is rose moderately velopments. Negotiated wages rose moder- because many sectors that are hardly directly in Q4, and actual earnings ately in the fourth quarter as well. The latest affected by the measures, such as industry, hardly, owing to pandemic wage agreements provide for low wage in- have continued to recover so far. Second, en- creases following several zero months at the terprises in the sectors strongly affected by the start of the contractual term. Having decreased containment measures, such as retail trade and in the third quarter, actual earnings may have the accommodation and food services sector, Deutsche Bundesbank Monthly Report February 2021 9

are likely to be increasingly adapting to the The outlook for this year remains uncertain. As Deficit and debt conditions of the pandemic. According to the things stand, both the deficit and the debt ratio ratio expected to stay at similar ifo Institute, enterprises from the retail and ac- could move more or less sideways. Because levels in 2021 commodation and food services sectors, for ex- parts of the economy will remain severely im- ample, were distinctly more optimistic about paired by the containment measures at first, their business situation in January than in April many support measures will stay in place or be 2020. However, industry could encounter adapted. In addition, the solidarity surcharge headwinds from growing supply bottlenecks has been partially abolished and child benefits for a number of intermediate products owing, significantly raised. However, the upturn should for example, to border closures or stricter bor- gradually pick up speed over the course of the der controls. On the demand side, private con- year, also increasingly easing the burden on sumption is likely to suffer owing not only to public finances. the closure of consumption opportunities during the pandemic but also to the restoration of Although the deficit recorded by the central 2021 central VAT rates to their original levels. As infection government budget was very large at the end government budget contains figures decline, vaccines become more widely of 2020, it was nonetheless considerably buffers for further crisis available and the containment measures are smaller than planned. The standard limits im- support gradually eased, the current drags on growth posed by the debt brake were exceed by only should slowly recede, however. Economic out- around €40 billion rather than by around €120 put is therefore likely to return to a significantly billion. In line with this, the annual repayments, higher level from the second quarter and con- which are due from 2023 onwards, will run at tinue its recovery. However, the future outlook just €2 billion instead of €6 billion. A very large remains closely linked to developments in the volume of net borrowing is expected again this pandemic, with the risk of further setbacks year. However, this will contain generous buf- stemming from mutations of the virus, in par- fers which can be used fairly flexibly during the ticular. crisis. Some of these buffers have already been earmarked as part of the most recent govern- Government’s The coronavirus crisis also shaped German fis- ment decisions – for example, for a second significant cal policy last year. Starting from the first wave child bonus or additional spending on vaccines. contribution to stabilising the of infections in March, extensive measures Nonetheless, a great deal of leeway remains to coronavirus crisis reflected by were taken to support the healthcare system, allow the funding of additional measures if re- high deficit and enterprises, and households. General govern- quired by the crisis. Setting a time limit on clear rise in debt ment investment continued to grow at a dy- these measures will prevent strain on future namic pace. Moreover, the tax and social se- budgets. curity system had an automatic stabilising effect during the economic downturn, with tax The general government deficit is likely to fall Public finances and social security contributions decreasing in significantly in 2022. To wit, the economic re- will recover as pandemic line with corporate earnings, wage income and covery is set to firm once the coronavirus pan- subsides, but expenditure set private consumption, and wage income losses demic has died down, and support measures to rise regard- being offset to some extent by social benefits. may be discontinued. Many of the projections less of the coronavirus As a result, a large general government deficit published since the autumn indicate a struc- crisis was recorded in 2020. Initial reports in January tural deficit of around 2% of GDP. Rising social put it at almost 5% of GDP, following a surplus insurance contribution rates have probably al- of 1½% of GDP a year earlier. The debt ratio ready been factored in here, as was the case in could have risen by roughly 10 percentage the Bundesbank’s December projection, for ex- points to around 70% by the end of 2020. ample. For the most part, this is not a direct consequence of the coronavirus crisis, but instead reflects additional spending on educa- Deutsche Bundesbank Monthly Report February 2021 10

tion, climate policy and digitalisation, for ex- gauge exactly how much need there will be to Adjustment ample. Moreover, expenditure on pensions, adjust German public finances in the future. Al- needs are limited from healthcare and long-term care is growing rap- though there will probably not be sufficient today’s perspective and should idly in the wake of political decisions and as a room for additional spending, or for tax cuts, be spread over result of demographic change. While interest the need for consolidation at all levels of gov- several years expenditure declines, growth in other expend- ernment does not appear exceptionally great iture (primary expenditure) is therefore likely to overall from today’s perspective. Moreover, the remain dynamic. It could thus reach a new rules allow adjustments to be spread out over a peak as a share of GDP. The tax and social con- period of time. Central government can thus tributions ratio is also expected to reach a rela- use its generous reserves, which amount to al- tively high level in historical terms. most €50 billion. No specific decisions will be made until the central government budget for Remain focused Overall, it is appropriate for fiscal policy to re- 2022 is adopted after the general election. on managing main focused on stabilisation at first in order to the crisis, then return finances deal with the crisis as effectively as possible. Regardless of the coronavirus crisis, social se- Social security to sound footing Once the pandemic subsides, it will be time to curity funds will require considerable structural funds under financing return public finances to a sound footing. A adjustment in the future. This is mainly the re- pressure good way to anchor a multitiered policy of this sult of demographic change, but also of the ex- sort consists of fiscal rules that provide fiscal tensive benefit increases adopted over the last leeway in a crisis while at the same time ensur- few years. Contribution rates are therefore ex- ing a solid outlook for public finances. This pected to rise sharply – first for health insur- could take various forms. Both the European ance and then for pension and long-term care fiscal rules and the German debt brake cater to insurance schemes. It will be key here to set this two-pronged objective. out a roadmap for social security contribution rates, central government funds and the level Fiscal rules ultimately mean that receipts and of benefits going forward. Without further ad- expenditure need to be matched and that pri- justment, the central government budget is un- orities need to be set. Given the high levels of likely to have the capacity to take on additional uncertainty at present, it is difficult to reliably structural burdens here.