German Economy to Begin Recovery in Second Quarter, Bundesbank Says

(Bloomberg) --

The German economy should start its recovery in the course of the second quarter as restrictions imposed to contain the pandemic are gradually lifted, the Bundesbank predicted on Monday.

Yet business activity will significantly undershoot the level recorded in the first three months of the year, when Germany suffered its deepest contraction in a decade, the central bank said in its monthly health-check on Europe’s largest economy.

While private spending and investment have suffered badly from lockdown measures, the construction industry appears to be relatively robust. Fiscal spending is also delivering a positive impetus, according to Bundesbank.

“There is currently a lot to suggest that the overall economic momentum is going to improve in the course of the second quarter as restrictions are being lifted and the recovery will get under way,” the report said. “But the degree of uncertainty about future economic developments is very high.”

Germany is gradually emerging from its pandemic hibernation as restaurants, schools and factories reopen across the country, and the scale of the economic damage becomes apparent. Some six million workers received state-wage support in April, according to the report.

The government, which has run surpluses for the past six years and lowered its debt ratio, is trying to keep businesses afloat with hundreds of billions of euros in grants, loans and credit guarantees. The pandemic highlights the importance of solid public finances to deal with declines in tax revenues and increased costs of financial aid for companies and workers, the Bundesbank said.

“Germany can shoulder these challenges because of the considerable leeway that was built up before the crisis,” according to the report. “When fiscal stabilization measures expire and economic development picks up, at least the public finances will then to a large extent automatically improve again.”

To restart the economy after the lockdown, the government is working on new stimulus measures. The Bundesbank stressed that the program should be targeted and temporary, and could consider measures that focus on fighting climate change and digitizing the economy.

The German central bank pointed to cheap loans from Europe’s rescue fund ESM and transfers from the EU budget as good forms of solidarity. Joint debt issuance, on the other hand, would “logically” require deeper European integration, it said.

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