How COVID 19 impacted on German economy?

German Economy

From the April 2020 to April 2021, there was a negative growth in employment of the German economy for 13 months. After that in May 2021, there was only small increase in employment.

When we consider the German economy, it can be identified as the largest economy in Europe.

Under the nominal GDP indicator; Germany is considered as the fourth largest economy in the world and under purchasing power parity indicator; Germany is the fifth largest economy in the world.

Also, Germany is the third largest importer and exporter in the world scientific and technological market.

German has is a developed country in the world and it has a very high human development index. Because, Germany offers different types of facilities for the citizens that definitely lead to higher human development. As examples, we can say Germany has established a universal health care system, tuition-free university education, environmental protections and so on.

According to the above information, it is clear now Germany is a country that has well established economy, has a higher human development and has very good demographic characteristics. But, because of the COVID 19 pandemic, economic and social aspects of Germany have very badly affected.

Impact of Covid 19 on German economy

Germany’s economic growth in 2020

After the 2009 housing crisis, the German economy has been expanded until the year 2020. But in the year 2020, the German economy has contracted in 5 percent as a result of the COVID-19 pandemic.

Many sectors of the German economy have fallen. For example, we can say the manufacturing industry has decreased by 10.4 as a result of the disruption of the supply chain, the decline in the non–food stationary retail, foreign travel, hospitality services and so on. Further, there is a 3.5 percent contraction in the gross fixed capital formation due to the decrease of private investment (ec.europa.eu, 2021).

To read more about how economic growth can be measured , kindly click here

Germany’s economic growth in 2021

Earlier, it was estimated that in the year 2021, there will be economic growth of 3.1 percent. But after that, they hoped only economic growth of 2.7 percent and finally German economy achieved 2.9 percent economic growth.  Also, according to statistics for 2021, Germany is an economy that has a slower economic growth rate in the eurozone. Economists predict that it will take significant time to recover Germany to the pre-pandemic level.  In the year 2022, economists predict that there will be economic growth between 4 to 4.6 percent.

As mentioned above German economy has contracted very badly. As a result of it, unemployment in the country has increased very fast and inflation of the country has been negative. From this point, I will discuss how unemployment and inflation in Germany were affected by the COVID-19 pandemic.

Unemployment of Germany

Unemployment means the situation that, although the people actively seek for employment, they are not able to find a job.

The following graph shows how employment in Germany has declined in other words unemployment has increased due to the COVID-19 pandemic.

* Here, people who engaged in short-time jobs and lost their jobs are not the people who lose their job.

According to the above graph, from April 2020 to April 2021, there was a negative growth in employment in Germany for 13 months. After that in May 2021, there was only a small increase in employment.  After that, employment increased further. But it has not recovered to the pre-pandemic level yet. So it is very clear that the COVID-19 pandemic has seriously increased unemployment in Germany.  We can discuss the employment data of Germany in the years of 2020 and 2021 separately as follows. (Federal Statistical Office – Destatis, 2021)

Unemployment statistics of Germany for the year 2020

Before the COVID 19 crisis in the February of 2020, there was an increase in the employment and it was 0.4 percent when compared with the employment statistics a year earlier. When compare with the December 2019, employment of Germany has decreased from 1.6 percent or 731,000 persons in the December of 2020. When compare with the May 2020, employment of Germany has decreased from 1.5 percent in October of 2020.

According to provisional calculations, in the 4^th quarter of 2020, 44.8 million of people averagely engaged in jobs. When compare with 3^rd quarter of 2020, it was an increase in 21,000 employments. But as a percentage there was a zero percent of employment increase. In other words, increase in employment in the 4^th quarter was insignificant when compared with the 3^rd quarter of 2020.

As per the findings of the labour force survey, the unemployment rate for December 2020 was 4.4 percent. There was a 0.5 percent increase in December 2020 when compared with the last month. The total unemployed labour force in Germany, in the December of 2020 was 1.95 million of people.

Unemployment statistics of Germany for the year 2021

In the year 2021, the unemployment rate of Germany decreased continuously and it was 3.5 percent. Based on the seasonally adjusted method, the total number of employed people in the October of 2021 is less than 368,000 when compared with the total employed people in the February of 2020 which is a month before the COVID-19 pandemic affected to German economy . As a percentage, it is a decrease of 0.8 percent.  According to the Federal Statistical Office’s provisional calculations, a total of 45.2 million people are employed in Germany. When we consider about year 2021, from March to September, there was a 0.1 percent or 48,000 average monthly increase of employment.

The unemployment rate for October of 2021 was 3.0 percent. In the October of 2021, employment raised by 0.6 percent or 268,000 employed people when compared with the October of 2020. In this month also, 1.31 million of people were unemployed. But when we compared it with October of 2020, there was a decline of 305,000 unemployed people or 18.9 percent. Without the seasonal adjustments, there was an increase of 0.3 percent or total of 122,000 employed people in the October of the year 2021 when compared with September.

So, according to the above-mentioned statistics, from April 2020 to April 2021, there was a negative growth in employment in Germany for 13 months. After that in May 2021, there was only a small increase in employment.  After that, employment increased further. But it has not recovered to the pre-pandemic level yet. So it is very clear that the COVID-19 pandemic has seriously increased unemployment in Germany.

Why increasing unemployment is not a good trend?

Increasing unemployment is not a good trend. Because it reduces economic performance and social benefits. Higher unemployment means more people lost their job opportunities. This presents a negative economic growth in the German economy and it decreases the GDP per capita of Germany. Also, as the social aspects, when people lost their jobs, their purchasing parity is decreased. Then they have less capability to buy the goods and services that they need. In other words, poverty of the country has increased. On the other hand, unemployment increases income disparity. Because unemployment means a situation where some employees lose their jobs while other employees do not lose their jobs.

Inflation of Germany

Inflation means the increase of the general price level and decrease of the purchasing power of a country. Post-COVID 19 pandemic inflation situations can be graphically presented as follows.

 According to the above graph, in the year 2020, there was only a 0.5 percent annual average inflation rate whereas, in the year 2019, there was only a 1.4 percent annual average inflation rate according to the consumer price index method. The inflation rate in the year 2020 was the lowest inflation since the year 2009. Because, in the year 2009, the inflation rate of Germany was negative 0.3 percent. But as we can see in the year 2021, the inflation rate of germany has increased vey fast and it was 3.1 percent. According to Katharina Utermöhl, an economist at Allianz, in the October of the year 2021, there was an inflation of 4.6 percent. That is the highest inflation rate in Germany after 28 years. Annual average inflation for Germany will be between 1.9 percent to 2.6 percent for year 2022 (Arnold and Chazan, 2021).

Inflation statistics of Germany for the year 2020

According to the above graph, from the month of July to the end of the year there was a negative inflation in the Germany. This happened as a result of the following situations.

One of the major reasons for the negative inflation of the Germany was reduction of the temporary value added tax (VAT), and energy prices. It has decreased the consumer prices from a significant amount. As examples, energy products’ prices have decreased from 4.8 percent. If we have excluded the energy prices on the inflation rate, annual average inflation rate for the year 2020 would have been 1.1 percent. Because there is a price increase in some sectors of the German economy. As examples we can say, annual average food price of the country has increased in 2.4 percent and annual average price of the services has increased from 1.3 percent. So, effect of the higher price contraction of the energy sector on the annual average inflation rate has reduced by other sectors.

When compared with the November of 2020, in the month of December, inflation based on the consumer price index has raised from 0.5 percent. But when compared with the December of 2019, in the month of December 2020, inflation has declined from 0.3 percent. In other words, there was a deflation of 0.3 percent. This was mainly caused by VAT reliefs and crude oil price decreases.

Inflation statistics of Germany for the year 2021

As I mentioned above, in the year 2021 inflation rate of Germany was 3.1. In October of the year 2021, there was an inflation of 4.6 percent.

Food inflation in Germany is continuously increasing in the year 2021. But it is more predictable than heating oil and fuel prices. Heating oil and fuel prices have increased very fast this year. This can be considered as one of the major reasons for the higher inflation this year. When compared with October of 2020, in the October of 2021, inflation has increased from 7 percent, and especially when we consider energy products’ prices, inflation has increased from 18.6 percent in the October of 2021 to October of 2020.

Also, when we consider food prices, inflation has increased from 4.4 percent in the October of 2021 when compared with October of 2020, especially prices of the necessary foods such as eggs, cereals, bread, and so on. Further, when we consider service prices, inflation has increased from 2.4 percent in the October of 2021 when compared to October of 2020 as a result of the increasing vehicle maintenance and repair costs, catering and café services, social facilities and so on. So, excluding the energy prices, the inflation rate of Germany would have been 3.1 percent.

According to above information, in the year 2020, as a result of the COVID 19 pandemic, there was a deflation from June to end of the year. In the year 2021, inflation of the country has increased very fast.

Why both deflation and higher inflation are not good?

Both deflation and higher inflation are not good macroeconomic trends. When there is deflation, it means there is an economic contraction. On the other hand, higher inflation means the general price level of a country is increasing very fast. Higher inflation also decreases the purchasing power of the people. Because, then people can buy lower amount of goods and services than earlier. So, the poverty of the country is increased. Also, higher inflation increases income disparity.

Conclusion

When we consider about German economy, it can be identified as the largest economy in the Europe. Under nominal GDP indicator; Germany is the fourth largest economy in the world and under purchasing power parity indicator; Germany is considered as the fifth largest economy in the world. But as a result of COVID 19 pandemic, German economy has been seriously damaged and in this study, I have comprehensively analyzed effect on unemployment and inflation.

From the April 2020 to April 2021, there was a negative growth in employment of the German economy for 13 months. After that in May 2021, there was only small increase in employment.  After that, employment has increased further. But it has not recovered to the pre – pandemic level yet. In the year 2020, from the month of July to the end of the year there was a negative inflation in the Germany. In the October of the year 2021, there was an inflation of 4.6 percent. That is the highest inflation rate in Germany after 28 years.

To recover the German economy, federal government of Germany and the Deutsche Bundesbank have used the expansionary demand policy by implementing fiscal policy and monetary policy. After that, demand for goods and services have been increased and both employment and inflation were increased. So, we can identify higher inflation, as the main drawback of the demand side economic policies.

Reference list

Arnold, M. and Chazan, G. (2021). German economic recovery stumbles as Covid cases hit record high. Financial Times. [online] 10 Nov. Available at: https://www.ft.com/content/bdef3d1f-917b-4920-9d9b-ee5f62b9b3c8.

Buch, C. and Regensburg (2021). The corona pandemic – economic consequences and economic policy responses. [online] www.bundesbank.de. Available at: https://www.bundesbank.de/en/press/speeches/the-corona-pandemic-economic-consequences-and-economic-policy-responses-876338 [Accessed 4 Dec. 2021].

ec.europa.eu. (2021). forecast_winter_2021. [online] Available at: https://ec.europa.eu/economy_finance/forecasts/2021/winter/ecfin_forecast_winter_2021_de_en.pdf.

Federal Statistical Office – Destatis (2021a). Inflation rate in 2020: +0.5% on the previous year. [online] Federal Statistical Office – Destatis. Available at: https://www.destatis.de/EN/Press/2021/01/PE21_025_611.html [Accessed 3 Dec. 2021].

Federal Statistical Office – Destatis. (2021b). December 2020: employment almost unchanged on the previous month. [online] Available at: https://www.destatis.de/EN/Press/2021/01/PE21_041_132.html [Accessed 3 Dec. 2021].

Federal Statistical Office – Destatis. (2021c). October 2021: employment increased again by 0.1% on the previous month. [online] Available at: https://www.destatis.de/EN/Press/2