Show all

Germany in recession as coronavirus blights eurozone economies | Enterprise

Germany has fallen into recession following the sharpest economic slump since the 2008 financial crisis, as the coronavirus pandemic causes severe damage for growth and jobs across the eurozone.

Europe’s largest economy shrank by 2.2% in the three months to the end of March, the country’s second-largest decrease since reunification.

On Friday, the German federal statistics office also revised down its GDP estimate for the fourth quarter of 2019 to -0.1%, indicating the country was close to recession before the coronavirus pandemic began.

Economists consider two consecutive quarters of falling GDP to be the technical definition of a recession. Germany and other eurozone nations suffered at the end of last year as the US-China trade war dragged down international demand for exports, hitting the country’s large manufacturing base while business investment also slumped.

One of the two main definitions of recession in the UK is at least two quarters of negative economic growth. Judged by this yardstick, the UK was last in recession in 2008-09, when there were six consecutive quarters of negative growth. 

Some economists believe this definition of recession is flawed, since an economy would not be in recession if it contracted by 5% in the first quarter, expanded by 0.1% in each of the following two quarters and then contracted again by 5% in the fourth quarter. It would, however, be deemed to be in recession if it grew by 5% in each of the first and fourth quarters but contracted by 0.1% in each of the second and third quarters.

An alternative – and tougher definition – is a full calendar year of negative output. Given the UK economy has grown on average by 2.5% over many decades, it is rare for gross domestic product (GDP) to fall on an annual basis. There have been only five such years since the end of the second world war: 1974, 1975, 1980, 1981 and 1991.

The United States has its own method of assessing recession, with the National Bureau of Economic Research’s business cycle-dating committee making a judgment.

The NBER defines recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales”.

France and Italy have also slid into recession as lockdown measures across the eurozone drag down the economy at the fastest pace since the creation of the single currency bloc.

Official figures on Friday showed eurozone GDP shrank by 3.8% in the first three months of the year, confirming an earlier estimate made at the end of last month.

GDP across the wider European Union shrank by 3.3%. A steeper decline was prevented by countries such as Sweden and Finland, potentially because of less stringent lockdowns.

France’s economy suffered the steepest decline, shrinking by 5.8% after a decline of 0.1% in the previous quarter. Italy’s contracted by 4.7% on the heels of a 0.3% fall in the last three months of 2019. The UK contracted by 2% in the first quarter, although it moved later to introduce lockdown measures than other European nations.

Britain recorded zero growth in the fourth quarter, meaning the country has yet to formally enter recession. However, given the scale of the pandemic, the chancellor, Rishi Sunak, has warned that Britain is facing a “significant recession”.

Economists said the fallout from Covid-19 had been similar across the eurozone. Claus Vistesen, chief eurozone economist at the consultancy Pantheon Macroeconomics, said: “The Covid-19 epidemic did not impact activity in January and February, but the hit in March was more than enough to ruin the quarter as a whole.”

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Sharp declines in consumer spending and investment by manufacturers were the primary factors behind the plunge for GDP as lockdown measures took hold. Stronger levels of government spending to cushion the blow prevented an even sharper decline.

Simon Wells, chief European economist at HSBC, said growth in the eurozone would probably take longer to recover than previously expected, as the fallout from Covid-19 continues. “We see a deeper contraction and a more sluggish recovery,” he said.

Following a sharp decline in the first quarter, he said the judgment also reflected China’s experience of exiting lockdown, which has been slower than initially hoped. “It also reflects a judgment about higher ‘lingering effects’, i.e. consumers and firms alike remaining highly cautious and some firms choosing not to reopen, even as mandated lockdowns in Europe ease,” he added.

Comments are closed.