Germany’s economy contracted 10% but the unemployment rate barely budged

07/30/2020 World


Despite the historical collapse in German GDP, the unemployment rate in the world’s fourth largest economy reached a few more levels, thanks to short-term work. program that has roots that date back a century. It has been used frequently to protect jobs in Germany since the oil crisis in the 1970s.

According to Germany’s federal statistics office, second-quarter GDP decreased 10.1% in the first quarter, its worst decline since records began in 1970. That equates to an 11.7% decline in the same period last year. EU GDP data for the quarter will be released on Friday.

With the exception of public spending, all areas of the German economy. including exports, imports, investments and household expenses, suffered sharp falls.

The drop removed nearly a decade of growth and was “even worse than expected,” according to Berenberg economist Florian Hense.

However, despite the loss of production, Germany’s unemployment rate rose to just 4.2%, from 3.8% at the end of March, according to EU data released on Thursday. That translates to the loss of 203,000 jobs, bringing total unemployment in Germany to 1.86 million. EU unemployment stood at 7.1% in June, compared to 6.5% in March.

It is a far cry from the 11% unemployment rate in the United States. Like Germany, the US economy registered its worst decline on record between April and June, falling 9.5%, or nearly 33% at an annualized rate.
Despite adding 7.4 million jobs through May and June, the United States continues to lose nearly 12 million jobs since February, according to the Bureau of Labor Statistics. Unemployment in the United States was 17.8 million in June. Unemployment claims rose for the second consecutive week last week, in a sign that the US recovery may be stagnant.

The large discrepancy in unemployment rates dates back to Germany’s “Kurzarbeit” program. Short-term work protects jobs by allowing companies to cut hours and wages, which are then subsidized by the state.

About 6.7 million Germans Employees currently work this way, according to Carsten Brzeski, ING’s Eurozone chief economist.

Germany has also unleashed one of the largest coronavirus stimulus packages in Europe, spending € 130 billion ($ 145 billion) on everything from electric car subsidies and tax breaks to help for families with children. It is also helping to pay a € 750 billion ($ 884 billion) recovery package for the EU countries most affected by the crisis.
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Economists said the lowest point of Germany’s economic downturn was probably reached in April, with a pickup in activity starting in May. That rebound could continue in the current quarter through September.

“The worst quarter in history could be followed by the best quarter in history,” said ING. Brzeski added that the economy is also poised to benefit from tourists taking their summer vacations at home rather than traveling abroad.

Still, there are some signs that the rebound is losing steam, according to Commerzbank economists Jörg Krämer and Ralph Solveen.

Factories take time to recover

They point to truck traffic as a measure. A good indicator of industrial production, truck traffic showed a significant recovery since late April, but has hardly increased since mid-June, clients said in a note.

Manufacturing is expected to take much longer to recover than services and construction, according to Brzeski, Given the disruption of global supply chains and economic weakness in major trading partners, such as the United States.

At the heart of German industry is Volkswagen (VLKAF), the world’s largest automaker. It was reduced to an operating loss of € 1.4 billion ($ 1.6 billion) in the first half, from a gain of € 9.6 billion ($ 11.3 billion) a year earlier. Revenue fell 23% and the company sold 27% fewer cars to customers.
Volkswagen still waiting to publish an operating profit for 2020, maintaining previous guidance, but reiterated a prior warning that global demand for new vehicles is likely to drop from 15% to 20% in 2019. “The first half of 2020 was one of the most challenging in the history of the company due to the Covid-19 pandemic, “CFO Frank Witter said in a statement.

The company employs more than 294,000 people in Germany, or almost half of the country’s total workforce.

– Julia Horowitz, Anneken Tappe and Tami Luhby contributed reporting.

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