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May 21, 2020

Germany enters recession as construction continues across the country

With over 177,000 cases and over 8,000 deaths reported thus far, Germany has been one of the worst hit countries in the world by the Covid-19 virus outbreak. In response to the outbreak the German Government has announced several containment measures in order to slow the spread of the virus across the country. The measures include closing down non-essential businesses such as restaurants, cinemas and cafes, and educational institutions such as schools and universities have also been closed. On the economic policy front, the German Government has increased spending to support businesses and workers adversely affected by the virus outbreak. An example of the increased support given to businesses is the Kurzarbeit (short work) scheme, which allows firms to apply for grants, and in return, firms keep workers on their payroll instead of making them redundant. This has kept unemployment low in Germany, with the IMF forecasting unemployment in Germany to rise only to 4% in 2020.

However, the lockdown has taken its toll on the economy, with Germany entering recession, with a 2.2% contraction in the first quarter of 2020. While the economy has entered a recession, the underlying figures indicate that the German economy has performed better than its peers in the first three months of 2020. While several sectors of the economy have been shut down because of the lockdown measures, the construction sector has thus far not been ordered to close.

The German Government has exempted the construction sector from the lockdown measures imposed in March, and it has been designated a key sector. While construction sites were closed across much of Europe, the German construction sector has been one of the exceptions with works largely unaffected. On 14 May, the head of the German construction industry revealed that the industry was operating at 80% of its regular capacity, higher than in Italy, Spain, France, and the UK where construction sites remained closed for several weeks. With several sectors of the economy adversely affected by the lockdown, the construction sector in Germany is likely to come out of the pandemic as one of the strongest sectors in the country’s economy.

Although exempt from the lockdown restrictions, construction has still been impacted, and the wider economic slowdown will hamper investment growth. Reflecting this, GlobalData expects construction industry output to record a contraction of 4.4% in real terms in 2020. Assuming that the outbreak of the virus is contained within the second quarter, there is the potential for a recovery in the second half of the year, with the government seemingly prepared to push ahead more quickly with infrastructure spending plans. However, a further downward revision to the forecast is likely in the event of a second outbreak with more severe lockdown measures being imposed.

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