Eric Heymann

German GDP: Down (Q1) but not out (in 2021). The longer “hard” lockdown, weather-related losses in construction and impairments in car output due to chip supply problems have prompted us to cut our Q1 GDP forecast to -2% qoq. We continue to expect a strong rebound in the summer half propelled by healthy global demand, supportive fiscal and monetary policy and German households’ pent-up demand. Inflation: Now expecting 2% for 2021! The Jan print of 1% yoy surprised massively to the upside, in part due to one-offs. But the strong rise in core goods prices begs the question whether the Jan readings could herald stronger underlying inflation dynamics. There are still strong arguments for a continuation of structurally low inflation dynamics. However, we see risk that price dynamics could strengthen more strongly through impaired supply conditions. Overall, we now project the inflation rate to average 2.0% in 2021. Towards the end of 2021 the headline rate could spike to as much as 3% before easing to 1 ½% in Q1 2022. [more]

If green hydrogen is to make a significant contribution to climate-friendly energy supply in the future, it will need to be produced (1) in large quantities, (2) cost-efficiently and (3) using low-carbon methods. Any solutions to these problems have remained in the realm of theory so far. Additional challenges arise in connection with the transport and storage of hydrogen. Initially, green hydrogen will be used to satisfy large-scale demand at specific locations, for example in energy-intensive industries. Like many other climate-friendly technologies, hydrogen will need government subsidies in the beginning. In the longer run, hydrogen might be used in the transport sector as well, for example as aircraft or ship fuel. In theory, hydrogen is highly versatile. However, it is quite expensive, too. That is one reason why hydrogen will probably make only a small contribution to the national and global energy transition in the next one or two decades. [more]

The COVID-19 pandemic has triggered unusual cyclical volatility in the German auto sector. However, structural challenges are much more relevant for the sector - some stemming from regulatory framework conditions (i.e. EU CO2 targets for new cars), others from market developments. Traditional factors which determine a country’s attractiveness as an industrial location, such as the tax burden on corporates, wages or working time flexibility, have recently deteriorated in Germany, at least in an international comparison. Germany’s share in both global and European car production may decline over the coming years. The German car industry is better prepared for the electric mobility future and other structural challenges than Germany as a production location. [more]

The COVID cycle and vaccination progress will drive the economy in 2021. We expect that infection rates will not come down decisively before Q2. By summer vaccination numbers should reach critical mass. A strong recovery starting in Q2 should yield an annual GDP increase of 4.5% after a 5.5% drop in 2020.
All attention on the super election year 2021: Germany is facing federal elections and multiple state elections. Our baseline scenario is a conservative-green government, but coalition talks will significantly test the willingness to compromise on both sides.
(Also in this issue: global trade and exports, private consumption, labour market, equipment and other investment, the German housing market, public finances, inflation, German industry's corona losses) [more]

The European Green Deal labels the goal of climate neutrality by 2050 as a growth strategy where no one is left behind. This is akin to squaring the circle. In the next few years, we will see whether we, as a society, are ready for an honest democratic discussion about climate neutrality. We will have to deal with inconvenient questions and inconvenient truths. But if this discussion does not take place, climate neutrality will remain a just topic for fine speeches and promises – and nothing will be said, much less done, that could hurt anybody. [more]

Q3 GDP surprise: A rear mirror view – but obstacles right in front. With the partial lockdown during November, the economy will almost certainly see another negative quarter, even in an optimistic scenario where restrictions succeed in squashing new infections and will be completely abolished by the end of November. Prepare the German healthcare sector for regional bottlenecks – protect risk groups better: The number of patients in intensive care and hospital capacity is just as important as the number of new infections. We estimate that 400,000 acutely infected patients are the limit for intensive care units. (Also in this issue: inflation outlook, German labour market, corporate insolvencies, German auto industry, global construction industry, German corona policy, open borders in the EU) [more]

During the last few weeks, the German Federal Foreign Office has issued more and more travel warnings for other EU countries on the grounds of rising COVID-19 infection figures. If infections continue to trend upwards or remain high during autumn and winter, the number of travel warnings for EU countries and regions will rise as well during the winter season of 2020/21. And unless policymakers take measures to mitigate the impact, the tourism industry, in particular travel agents in Germany and hospitality providers abroad, will be faced with a similar situation to a new lockdown in the coming weeks and months. Quick and uncomplicated access to reliable coronavirus tests might be an option to allow travelling during the pandemic. The test costs should be borne by the travellers themselves. Ultimately, corona-related health risks will have to be weighed against the impact of higher hurdles for travelling and their negative economic consequences. [more]

We have lifted our GDP forecast for 2020 to -5.5% and see the economy expanding by 4.5% in 2021. An important factor is that the rebound during Q2 – when GDP contracted by 9.7% – turned out more dynamic than expected. The momentum carried over into July. Even with some likely short-term moderation in August, we now expect Q3 GDP to increase by 6.0% qoq. Together with a 2.5% expansion in Q4, this should result in an annual GDP drop of “only” 5.5%, compared to the 9% expected in early May at the height of the pandemic in Europe. The higher carry-over lifts our 2021 GDP growth forecast to 4.5%, despite somewhat weaker momentum in H1 than expected earlier. (Also in this issue: labour market, bilateral exports, fiscal outlook 2020-22, German industry, the race for CDU leadership, and federal election prospects.) [more]

During the corona summer, Germans will probably travel less and for shorter periods of time than in former years. Destinations in Germany and in the neighbouring countries, which are only a car journey away, look set to benefit. In contrast, European holiday destinations which are usually reached by plane will see the number of tourists decline in 2020. Spain will probably be the main loser. Long-distance travel will not play a major role in 2020. The cruise boom is likely to come to an abrupt end. In 2020, the total amount spent by Germans abroad is likely to decline by 10-20%. Once the coronavirus crisis is over, climate and environmental regulation (in particular for the transport sector) will return as the main structural challenge for tourism. [more]

How deep is your trough? Daily activity trackers suggest that the economy turned at the end of April as lockdown measures were gradually lifted. But we still expect a double-digit decline in Q2 GDP. The EUR 130 bn fiscal package was somewhat above our earlier expectations but does not change our GDP forecast, especially as still-prevailing pandemic uncertainties might curtail the economic impact of the package. But upside risks to our -9% GDP forecast for 2020 have (somewhat) increased. (Also in this issue: corona pandemic update, German public finances, global trade, German tourism during the corona crisis, German politics goes European) [more]

Germany has got COVID-19 under control faster than many other countries. It also recorded one of the lowest infection fatality rates among the G10 countries. The complete fiscal policy U-turn in response to COVID-19 induced economic damage should allow the German economy to weather this crisis better than many other countries – although the impact will still be massive. We have identified six structural features of the German society contributing to its superior collective resilience. Due to these features we expect the German recession in 2020 to be less severe than in most other industrial countries. This crisis resilience should also further improve Germany’s relative position among the major industrial economies once COVID-19 has been overcome. And this will increase pressure on Germany to play an even more supportive role within EMU/EU in the medium term. [more]

Public attention has shifted away from climate change as the coronavirus pandemic has spread. Nevertheless, mitigating climate change and making sure that the growing global population has access to climate-friendly energy remain among the key challenges of this century. These issues will still be on the agenda when the pandemic is over. It is therefore an encouraging sign that many policymakers and corporates have said they will not only take into account, but pay more attention to climate protection when re-opening the economy. The heated discussion about which instruments are best suited to ensure climate protection will continue for years to come, though. [more]