German Economy Logs Worst Contraction On Record; Inflation Turns Negative

Germany’s economy contracted at the fastest pace on record in the second quarter as the coronavirus pandemic took its toll on exports, domestic consumption and investment, preliminary data from Destatis revealed Thursday.

Due to the reduction in the value added tax as part of the fiscal stimulus to underpin domestic consumption and counter the impact of the pandemic, inflation turned negative in July for the first time since early 2016, separate data from Destatis showed.

Gross domestic product fell by more-than-expected 10.1 percent sequentially after shrinking 2 percent in the first quarter.

This was the largest decline since the quarterly calculation started in 1970. Economists had forecast a decrease of 9 percent.

This was also much bigger than the downturn seen during the financial market and economic crisis. At the height of global financial crisis, GDP declined only 4.7 percent.

In its monthly report, released Monday, Bundesbank said the economic recovery is likely to continue in the second half of the year supported by the fiscal stimulus.

The statistical office said there was a ‘massive’ slump in exports and imports of goods and services as well as for household final consumption expenditure and capital formation in machinery and equipment.

Meanwhile, the general government raised its final consumption expenditure during the crisis.

On a yearly basis, GDP declined by a calendar-adjusted 11.7 percent in the second quarter versus economists’ forecast of 11.3 percent and the 1.8 percent fall posted in the first quarter.

Price-adjusted GDP also declined 11.7 percent in the second quarter.

For the first time the statistical office produced the GDP data within 30 days from the end of the quarter, which is about two weeks ahead of the usual release. The detailed GDP data is due on August 25.

The latest GDP data marks the trough of the crisis, Carsten Brzeski, an ING economist, said. As with any horrible ride, there is a strong feeling of relief that the worst is over.

Elsewhere on Thursday, data from the Federal Employment Agency also suggested that the pandemic has weighed on the labor market. The jobless rate remained at 6.4 percent in July versus the expected rate of 6.5 percent.

Nonetheless, the number of people out of work decreased by 18,000 in July compared to expectations for an increase of 43,000.

The labor market is still feeling the pressure of the corona pandemic, but the extensive utilization of short-time work is stabilizing the labor market, Federal Employment Agency CEO Detlef Scheele said.

In July, consumer prices fell unexpectedly by 0.1 percent year-on-year, reversing a 0.9 percent rise in June, preliminary data showed. Prices were forecast to rise 0.2 percent.

This was the first drop since April 2016, when prices slid 0.1 percent.

Bundesbank said inflation should turn out to be visibly positive again with the withdrawal of the VAT reduction in January 2021.

On a monthly basis, consumer prices were down 0.5 percent in July, faster than the expected fall of 0.2 percent. Final data is due on August 13.

EU harmonized inflation came to a standstill in July, following an increase of 0.8 percent in June. Economists had forecast a 0.4 percent increase.

Month-on-month, the harmonized index of consumer prices dropped 0.5 percent after rising 0.7 percent in June, while the index was forecast to fall 0.2 percent.

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