Economic Survey:

The economy has been hit hard by the collapse in global trade. Germany exports a large part of its output, particularly manufactured capital goods. Key trading partners in Europe have been badly affected by the crisis and stalling global investment has seen demand for capital goods plunge.

Increasing unemployment was cushioned by the government-supported short-time work scheme. Short-time work bore a much bigger part of the reduced demand for labour than did unemployment, with almost 20% of all dependent workers in short-time work in April 2020. An extended downturn would increase the need for resource reallocation, in which case consideration should be given to more active labour market policy, such as training or placement assistance.

A strong government response to the crisis has reinforced health system capacity while protecting jobs and firms. Loans, guarantees, grants and equity injections safeguarded liquidity, while a recovery package is supporting consumption and investment. These measures notwithstanding, bank vulnerabilities should be monitored closely as corporate and household defaults are liable to increase. There is around EUR 140 billion (4¼ per cent of GDP) of discretionary stimulus in 2020. The rate of consolidation needs to be carefully managed, as a rapid withdrawal of support could derail the recovery, particularly if underlying growth is weak.

The COVID-19 crisis exacerbates structural challenges from weak external demand and the energy transition. Policy needs to facilitate the shift to cleaner energy and new technologies in the automotive industry, while accelerating progress on digital transformation.

Infrastructure investment, which is critical for digital transformation and decarbonisation, has been insufficient and could be an important part of the recovery. Public investment has stepped up since 2014 and further spending on low-emission transport, digitalisation and health has been announced. These are key areas where more investment is needed, along with social housing, early childhood education and electricity networks. Two decades of low investment have left a backlog, while construction and administrative capacity and cumbersome planning procedures constrain delivery.

Infrastructure governance reforms and active federal government support are needed to overcome capacity constraints. Independent infrastructure planning advice would improve alignment across sectors and provide greater certainty for construction sector companies to expand capacity. Further streamlining planning processes, cooperation between agencies and more attractive employment conditions for public sector planners would help. Municipalities’ revenues have been hit hard by the crisis and measures to partially compensate for shortfalls will be insufficient to make up the backlog of municipal investment in transport infrastructure and schools.

Germany made considerable progress on climate change policy in 2019, which must not be derailed by the COVID-19 crisis. Key steps include introduction of emissions pricing in transport and heating, increased support for electric vehicles and charging stations, higher targets for renewable power generation, and a commitment to cease coal-fired generation by 2038 at the latest. Despite success deploying renewables in the electricity sector over the past two decades, emissions are high.