Germany on ‘road to recovery’ despite record growth plunge

Europe’s biggest economy is readying an extension of state wage subsidies to support recovery

Angela Merkel
Chancellor Angela Merkel has overseen a surefooted response to Covid-19 Credit: STEPHANIE LECOCQ/POOL/EPA-EFE/Shutterstock  

Germany is on the “road to recovery” from the shock of Covid-19 after business morale jumped unexpectedly during August, its leading economic institute said on Tuesday.

The Ifo’s closely watched business climate index improved for the fourth month running, to 92.6, with manufacturers and services firms seeing the biggest improvement in confidence.

The recovery signs emerged as official figures showed Europe’s biggest economy crashed a record 9.7pc between April and June – slightly better than the 10.1pc slump first estimated, but still the worst for at least half a century.  

However, the institute expects a 7pc bounceback this quarter. Ifo president Clemens Fuest said: “Companies assessed their current business situation markedly more positively than last month. Their expectations were also slightly more optimistic. The German economy is on the road to recovery.”

Europe's largest economy has been far less affected by Covid than other major rivals after emerging from lockdown sooner, while Germany's well-resourced healthcare system means there have been fewer than 10,000 deaths. The UK economy plunged over twice as deeply between April and June.

Despite the signs of business revival Chancellor Angela Merkel is poised to agree a further extension of Germany’s Kurzarbeit wage support scheme, which has helped pay the salaries of more than 10m workers, until March 2022.

ING economist Carsten Brzeski said the Ifo’s survey “kept hope of a V-shaped recovery alive” but added that Ms Merkel may need to extend other lifelines unveiled as part of a €130bn (£116bn) package of tax cuts and spending programmes in June.

“It will, in our view, not be the last discussion about possible extensions to crisis measures,” he said. “It is hard to see that the government would want to enter an election year with an increase in the VAT and a surge in unemployment and insolvencies.”

Germany has also recorded its first deficit for almost a decade after ditching its fiscally conservative stance on balanced budgets in March to throw billions in loan guarantees and subsidies at the crisis.

Official figures showed a deficit of €51.6bn for the first half of the year – its first slide into the red since the aftermath of the financial crisis in 2011, as coronavirus lockdowns hit government revenues as well as boosting state spending.

The 3.2pc deficit represents a rapid turnaround from the 2.7pc surplus recorded in the same period last year. It is also above the 3pc limit under the European Union’s stability and growth pact, which was suspended in the crisis.