Economic Survey:

03.03.2021

The German economy experienced a severe contraction in 2020 following a decade-long expansion. The initial COVID-19 outbreak was brought under control with less stringent containment measures than in many countries thanks to high health sector capacity and early testing, tracing and isolation of cases.

Resurgence of the virus in October led to renewed nationwide containment measures in November, including closure of hospitality and entertainment venues, while retail as well as schools remained open.

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.

Structural reforms and infrastructure investment can support the recovery

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.

Further policy steps are needed to meet the target to reduce greenhouse gas emissions by 55% by 2030. Coal-fired generation should be reduced ahead of schedule via stronger price signals, which is a cost-effective way to decrease emissions. Stronger price signals would also promote more efficient waste management. Energy efficiency requirements on new buildings are high, but energy efficient renovations need to increase by at least 50% to meet the 2050 goal of a near climate-neutral building stock. The transport sector is unlikely to meet its 2030 abatement target. Further action is needed on pricing for fuels, vehicles and roads, while providing alternatives through sustainable transport modes.
  • The COVID-19 crisis increases the importance of accelerating progress towards digital government and a data-driven public sector. Germany has been slow introducing digital public services, but progressing on high-impact services is now a priority. Greater efforts are also needed to enhance collaboration across levels of government and access to open government data.
  • Reducing high effective tax rates would remove one impediment to moving to jobs with higher earnings. Taxation of labour income is high; reducing this while strengthening environmental, property and capital income taxation and removing exemptions would improve incentives and increase efficiency. Building on Germany’s success with social partnerships can help firms and workers weather the economic downturn through training, collective agreements and continuing with effective social dialogue for setting minimum wages.
  • The share of the workforce covered by occupational licensing is the highest in the OECD. Occupational licensing reduces competition, pushing up prices and holding back productivity and job mobility. Licensing is likely to be particularly costly for immigrants who cannot use their skills, and in the construction sector where labour shortages hold back investment.
  • Housing shortages in urban areas prevent people moving closer to jobs. Lack of availability of developable land and stringent rent control hold back the housing supply response. Rent controls introduced in 2015 have not been found to have a negative effect on construction so far, but tighter measures such as the rent freeze in Berlin risk restricting mobility.

The full OECD overview can be found here.





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