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Germanys Macroeconomic Situation
Introduction
Germany is a country that has a long history and has always been at the forefront of global economic development. At the same time, in the 1990s, Germanys economy encountered a downturn which gave the country the name The Sick Man of Europe (Notermans & Piattoni, 2021). Still, Germany was able to overcome all the problems and entered the 2000s as the global economic powerhouse. Today, Germany continues to maintain its status as a highly-developed country and embraces new trends such as sustainability and carbon neutrality. Thus, it becomes interesting to trace the macroeconomic performance of Germany as a country with an advanced level of development. Research shows that starting in 2017, Germany demonstrated positive performance across domains such as Gross Domestic Product (GDP), unemployment, and inflation, but the COVID-19 pandemic negatively impacted Germanys economy.
Macroeconomic Trends of the German Economy in 2017-2019
It is reasonable to divide the assessment of macroeconomic trends of the German economy of the past four years into two periods, before and after the pandemic. The spreading of the COVID-19 virus across the globe became a significant factor that disrupted the economies of many countries on the planet. As a result, the analysis of the macroeconomic trends of the German economy based only on the 2021 data would not reflect the real potential of the country. Therefore, it is a viable strategy to assess the performance of the German economy before and after the pandemic to get a comprehensive understanding of the countrys capabilities.
As mentioned above, Germany is one of the leading economies in the world, which before 2020 manifested itself in many aspects, including the positive Gross Domestic Product. As indicated by the 2019 annual report of the German Federal Ministry for Economic Affairs and Energy, the countrys GDP has been positive from 2017 to 2019 (The Federal Ministry, 2019). At the same time, the rate of growth has been steadily decreasing over the three years. Whereas in 2017, Germanys GDP growth stood at 2.2, in 2018, it was 1.5, and 1.0 in 2019 (The Federal Ministry, 2019). Thus, it is possible to state that Germanys performance in terms of GDP had been raising concerns before the beginning of the pandemic. Essentially, the main trend experienced by Germany was the slow economic decline which translated into a decreasing GDP.
There are several factors and policies which contributed to the aforementioned trends of Germanys declining Gross Domestic Product. The main causes of the negative growth of Germanys GDP were the overall global economic downturn resulting from the U.S.-China trade war and U.S. tariffs on E.U. exports such as aluminum and steel (Walker, 2019). Basically, the international trade policies of China and the United States, the biggest markets for Germany, had a direct negative impact on the country. As a result, the areas of international trade and car manufacturing, which were substantial for Germanys GDP growth, experienced a downturn. Moreover, the German governments strict fiscal policy focusing on the annual reduction of public debt load also contributed to the decreasing GDP of the country. Thus, the trend of negative growth of GDP in Germany prior to the pandemic could be explained by unfavorable policies of foreign players and the countrys government.
Another notable metric that needs to be analyzed is the rate of unemployment. According to the OECD statistics, Germanys unemployment rate had been steadily decreasing from 2017 until the end of 2019, when it fell to 5% (OECD, 2021). Essentially, the economy produced new jobs at a rate that met the demand, and people were able to find work easily. Thus, Germany had a positive trend of a decreasing unemployment rate which continued to reduce despite the decline in terms of the countrys GDP.
Germanys favorable situation with employment in the period from 2017 until the end of 2019 can be explained by the successful implementation of policies by the countrys government. Germanys fiscal policies are targeted at ensuring social cohesion and involve the adoption of far-reaching measures such as labor-cost subsidies to assist long-term unemployed people in entering the labor market (The Federal Ministry of Finance, 2019). The federal government also designed a special strategy called MitArbeit, helping long-term unemployed people by providing them with individual advice, guidance, financial support, and employment opportunities. The government also introduced more affordable preschool childcare incentivizing people who have children to enter the workforce and not stay at home (The Federal Ministry of Finance, 2019). Thus, by building a social safety net, the German government seeks to encourage people to begin working and fill vacancies. Moreover, as mentioned above, Germanys economy is dependent on export, and the steady rise in the demand for German goods among foreign countries stimulated the emergence of new jobs. In such a situation, German workers had a better chance of finding a place to work.
Finally, inflation is another notable indicator that enables one to better understand the macroeconomic performance of Germany in the period before the COVID-19 pandemic. According to the data published on Trading Economics, the average inflation rate in Germany from 2017 until the end of 2019 was between 1.5-1.7% ( Germany inflation rate, 2021). Such an inflation rate can be considered low and acceptable, especially for a highly-developed country such as Germany. Thus, the main conclusion which can be made based on the information presented above, Germany had a fairly low and stable inflation rate in the period preceding the onset of the pandemic.
The low inflation trend of Germany can be attributed to the monetary policies of the European Central Bank, as well as the efforts of the German government to ensure reasonable spending. During the period between 2017 and 2019, the European Central Bank pursued a relatively conservative approach toward interest rates and inflation targets which was supported by the Deutsche Bundesbank, Germanys Central Bank (The Federal Ministry, 2019). As a result, Germany was able to maintain a low level of inflation and keep it under control. Moreover, every attempt by the European Central Bank to increase inflation targets was criticized by Germanys Central Bank to ensure that the countrys economy did not suffer from its uncontrollable inflation (Bundesbank, 2018). At the same time, the inflation in Germany also depended on global fuel prices, which considerably affected the growth and reduction of the inflation rate.
The Impact of COVID-19: Macroeconomic Trends of German Economy in 2019-2021
As mentioned above, the COVID-19 pandemic became a major factor in the global economy, which disrupted the economic performance of many countries. Germany was one of the countries that considerably suffered from the pandemic and different policies undertaken by the German government, foreign nations, and different agencies. Thus, it is extremely important to assess how the spread of the virus impacted the Gross Domestic Product, unemployment, and inflation of Germany.
As could be expected, the German GDP experienced a considerable downturn during 2020 and a significant recovery in 2021. Specifically, according to Germanys office of statistics, the GDP of the country decreased by 5% in 2020 compared to 2019 (The Federal Ministry, 2021). Such a result was not unusual since the COVID-19 pandemic led to numerous economic limitations. Moreover, Germanys drop in GDP was relatively acceptable when compared to the United Kingdoms decrease of more than 9% (Stephens et al., 2021). Nevertheless, in 2021, as stated by the German Economy Minister, the country will make a slight recovery demonstrating a 2.6% GDP growth ( German economy, 2021). Such data indicate that Germanys economy demonstrated its resilience and is now heading towards a return to the pre-pandemic level in terms of GDP.
The pandemic of 2020 made the German government introduce different measures to protect the health and safety of citizens, which directly impacted the economy. Lockdowns introduced by Germany as a way to counter the pandemic, restrictions on commercial activities and movement of people, and decreased consumer spending became significant drivers of the GDP reduction (Walker, 2021). In 2020, the federal government adopted supplementary budgets to allocate financing for immediate assistance and short-term aid measures (The Federal Ministry of Finance, 2021). The federal government also increased the borrowing limit to ensure that the state has the ability to cover all of the expenses. The country extended its stimulus programs into 2021, which further contributed to its budget deficit (The Federal Ministry of Finance, 2021). At the same time, the beginning of the vaccination and the loosening of restrictions imposed by the state allowed Germany to experience a slight recovery in terms of GDP in 2021.
Germany also experienced a negative impact of COVID-19 in terms of its unemployment rate, which was decreasing before the pandemic. Specifically, the unemployment rate in Germany in 2020 rose by 0.9% compared to 2019 and reached 5.9% (The Federal Ministry, 2021). Moreover, despite the aforementioned recovery in terms of GDP, the unemployment rate did not change significantly in 2021. According to recent estimates, in 2021, the average unemployment rate, when adjusted seasonally, will be approximately 5.7% ( Germany unemployment rate, 2021). Thus, as indicated, the statistics show that Germany is not yet able to return to the pre-pandemic unemployment rate, but the country keeps it at an appropriate level, and a positive trend can be observed.
One of the key factors behind the countrys ability to maintain a moderate unemployment rate even despite the pandemic and restrictions accompanying it is the governments fiscal policies. For instance, the country introduced a temporary value-added tax cut in order to support businesses across Germany (Dao & Mineshima, 2021). Additionally, the government delivered different measures to support businesses and households by expanding loan guarantees, providing short-time work benefits and liquidity to firms, and extending the unemployment benefits duration (Dao & Mineshima, 2021). Thus, by offering subsidies and support to businesses, the country managed to prevent companies from downsizing and making workers redundant.
The pandemic also affected inflation in Germany, which demonstrated a decrease in 2020 and rapid growth in 2021. Essentially, in 2020, Germanys annual inflation rate stood at less than 0.5%, whereas in 2021, it is expected to surpass 3% (European Commission, 2021). Thus, it can be concluded that the main trend inflation-wise in Germany during the two years of the pandemic is considerable fluctuations.
The extremely low inflation in 2020 and its sharp rise in 2021 can be explained by different phenomena and especially the governments efforts. In 2020, the German authorities introduced fiscal measures involving significant VAT cuts, which led to a reduction in inflation. At the same time, in 2021, the VAT returned to its standard level, which contributed to the rise in inflation (European Commission, 2021). Additionally, since inflation in Germany depends on fuel prices, their rise in 2021 also caused the inflation rate to increase.
Thus, taking into consideration the research presented above, it is important to make predictions about the future macroeconomic trends of Germany. According to the official estimates of Germanys National Bank, GDP will reach its pre-pandemic level only by the end of 2023. Additionally, the unemployment rate will continue to decrease as the German economy recovers from the pandemic. The inflation rate is also expected to stabilize in the coming years (Deutsche Bundesbank, 2020). Thus, the main macroeconomic trend of Germany for the next several years is the focus on recovery and return to the pre-pandemic situation.
Conclusion
Germany has one of the most advanced economies on the planet, yet its macroeconomic performance experienced considerable disruption during the pandemic, which required the passing of additional policies. Before the spreading of the COVID-19 virus, Germany had a slowing growth of GDP due to the trade war between the U.S. and China and strict fiscal policy. Yet, in 2020, Germanys GDP fell by 5%, which can be explained by the initiatives of the country to introduce pandemic restrictions. The country also experienced a downturn in the number of employed and a rise in inflation. At the same time, the current trend for Germanys macroeconomics is a slow recovery ad return to the pre-pandemic performance.
Reference List
Bundesbank (2018) Bundesbank advises against higher inflation target. Web.
Dao, M., and Mineshima, A. (2021) Germanys post-COVID-19 recovery in five charts. Web.
Deutsche Bundesbank (2020) Outlook for the German economy for 2021 to 2023. Web.
European Commission (2021) Autumn 2021 economic forecast: From recovery to expansion, amid headwinds. Web.
German economy minister slashes 2021 growth forecast. Web.
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Notermans, T., and Piattoni, S. (2021) Italy and Germany: Incompatible Varieties of Europe or Dissimilar Twins?, German Politics, 30(3), pp. 319339.
OECD (2021) Germany unemployment rate. Web.
Stephens, M., Wright, H., and Luckwell, G. (2021) Coronavirus and the impact on output in the U.K. economy: December 2020. Web.
The Federal Ministry for Economic Affairs and Energy. 2019 annual economic report. Web.
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The Federal Ministry of Finance (2021) German stability programme. Web.
Walker, A (2021) Coronavirus pushes German economy into recession. Web.
Walker, A. (2019) Germany narrowly avoids recession despite trade war hit. Web.
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