Fragile upswing The German economy in the second half of 2021 - Roland ...
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Fragile upswing
The German
economy in
the second half
of 2021
German Economy 2021 12 German Economy 2021
Fourth wave of Covid causing uncertainty
W-shaped economic recovery in progress
Labor market robust despite short-time work
Number of company insolvencies
remaining stable
Order intakes already above pre-crisis levels
Manufacturing capacity utilization likewise
above pre-crisis levels
Business expectations pointing down
Shortage of intermediate products
slowing upswing…
…and driving up producer prices
Consumer prices rising their fastest
in 30 years
Prevailing economic conditions
remain uncertain
Germany's economic upswing remains fragile
Cover image Nikada/Gettyimages
German Economy 2021 3Fourth wave of Covid
causing uncertainty
The pandemic is testing the patience of both society and
the economy
For a year and a half, the coronavirus pandemic has been the dominant
narrative – not just in public health matters, but also regarding its impact
on the economy. Hopes of a vigorous economic recovery this year were
severely dampened by a third wave of infections. Planned steps toward
opening up in the spring were delayed, with the result that many measures
did not end until the summer as the seasonal rate of infection declined
and the vaccination campaign got underway. The new, rapidly spreading
Delta strain of the virus is now once again pushing up incidence figures.
Data from countries such as the UK suggest that a rising vaccination rate
is easing the correlation between incidence rates and both hospitalizations
and deaths. Be that as it may, further restrictions could hit Germany at
the latest by fall 2021.
Incidence (at left) and vaccine uptake (at right, in %) in Germany
[data from Aug 11, 2021]
opening delayed
Hard lockdown
National 'emergency brake'
Steps toward
200 100
'Lockdown lite'
90
Lockdown with test projects
80
150
Phased plan
70
60
Hard lockdown
100 50
40
Hotspot strategy
30
50
20
10
0 0
01.04.2020 01.07.2020 01.10.2020 01.01.2021 01.04.2021 01.07.2021
Double-dose vaccination rate Single-dose vaccination rate
Sources: Johns Hopkins University, press research, Roland Berger
4 German Economy 2021W-shaped economic recovery
in progress
A repeat recession was successfully averted despite the
extension of lockdown measures
When the lockdowns ended, the German economy was able to gather fresh
momentum in spring 2021 and avoid stumbling into another recession.
In the second quarter of 2021, gross domestic product (GDP) increased by
1.6% sequentially, as documented in an estimate published by the Federal
Statistical Office. However, this recovery – bolstered mainly by private and
public consumer spending – fell short of the 2.0% anticipated by a group
of economists surveyed by Reuters.
The Bundesbank believes the pace of growth could increase as further
steps are taken to reopen the economy. If that happens, GDP could be back
to pre-crisis levels before the end of the third quarter of 2021. On the other
hand, this positive prospect is muted by the ongoing spread of the more
contagious Delta strain of the coronavirus. At the same time, supply chain
bottlenecks affecting intermediate products are driving price hikes and
preventing a faster rate of economic recovery.
GDP growth, 2015-2021
[adjusted for price, seasonal and calendar effects, in %]
Growth
in 20201:
10 Sequential change -4.9% 9.0
9.4
Year-on-year change
8
6
4
2 0.9 1.6
0
-2
-4
-6
-8
-10 -10.0
-12 -11.3
2015 2016 2017 2018 2019 2020 2021
1
Year on year change adjusted for price, seasonal and calendar effects
Source: Federal Statistical Office
German Economy 2021 5Labor market robust despite
short-time work
After a turbulent year, the labor market is returning to normal
– The shortage of specialists is coming back into focus
After a worrying spike in joblessness and the number of short-time
workers when the pandemic broke out, both indicators have stabilized in
recent months and are now falling again.
The unemployment rate has been in continual decline since the start of the
year and is already below 6% of the civilian labor force. Not so the figures
for short-time work, which bounced back up when the third wave struck at
the start of the year. With coronavirus restrictions now largely loosened,
however, the number of registered short-time workers is now dropping too,
although more than two million people are still on this list in Germany.
It is therefore reasonable to assume that Germany's labor market is on
its way back to pre-crisis levels. Numerous companies are even reporting
a more acute shortage of specialist labor than before the pandemic –
especially with regard to highly qualified staff.
Unemployment rate Trend in short-time workers
[in %] [millions]
6,5 6
5
6,0
4
5,5 3
2
5,0
1
4,5 0
01/20 07/20 01/21 07/21 01/20 07/20 01/21 07/21
Source: Federal Employment Agency
6 German Economy 2021Number of company insolvencies
remaining stable
However, consumer insolvencies are rising sharply to
record levels
The total number of insolvencies reported in Germany reached its highest
level for seven years halfway through 2021 – a surge almost exclusively
attributable to a significantly higher number of consumer insolvencies. One
reason was the delayed impact of the 2020 lockdown and the resultant
unemployment and short-time work effects. These effects were amplified
by the residual debt discharge provision, which came into force
in October 2020 and significantly eased the situation for overindebted
private individuals.
Contrary to widespread fears, however, company insolvencies are still
in decline – though it must be remembered that all kinds of extraordinary
effects during the pandemic have distorted the insolvency space.
Government assistance programs, for example, gave many businesses
sufficient liquidity to stave off insolvency proceedings. Moreover, the
requirement to file for insolvency under certain conditions was suspended
until the end of April 2021.
Insolvencies in Germany
[first half-year, in '000s]
65.7
62.1
58.3
56.1 10.9
53.7
11.9
12.0 48,0
11.8 11.1
10.8
39.2 36.1 34.3 32.9 28.2 46.0
11.0 10.2 9.9 9.7 9.0 8.8
2016 2017 2018 2019 2020 2021*
* Estimate dated June 22, 2021 Other insolvencies
Consumer insolvencies
Company insolvencies
Source: Creditreform
German Economy 2021 7Order intakes already above
pre-crisis levels
International demand is down and has now been overtaken
by domestic demand
The swift and steep plunge in new orders in spring 2020 was followed by
an equally rapid recovery. By June 2021, order intakes were already back at
their highest level since the financial crisis.
A sharp increase in large-scale contracts in particular was instrumental
in driving the rebound in new orders. While the overall order intake in the
manufacturing industry thus rose sequentially in June by 4.1% in real
terms, the gain would have been only 1.7% if large-scale contracts were
excluded.
With international demand flattening slightly in spring 2021, domestic
demand rose forcefully in the course of the year and has now outstripped
demand from outside Germany.
Order intakes in the manufacturing industry
[Volume index, 2015 = 100, adjusted for calendar and seasonal effects]
120
110
100
90
80
70
60
01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/
2015 2016 2017 2018 2019 2020 2021 2022
Total
Domestic
Foreign
Source: Federal Statistical Office
8 German Economy 2021Manufacturing capacity
utilization likewise above
pre-crisis levels
Only the automotive industry has not yet made up the
lost ground
Capacity utilization in the manufacturing industry too has recovered
strongly and is now well in excess of pre-crisis levels. The automotive
sector alone has not yet been able to catch up and is still slightly below
its levels before the crisis.
Bottlenecks in the supply of semiconductors are causing the problems
in the automotive industry and have forced many companies to roll back
production. In light of this chip shortage, the German Association of the
Automotive Industry (VDA) has had to revise its forecast for 2021
downward: After projecting 8% sales growth in Germany at the start of
the year, the VDA in July slashed this prediction to just 3%. Since German
car makers primarily manufacture electric and premium vehicles that
require exceptionally large quantities of semiconductors, these companies
are especially hard hit by the said supply chain bottlenecks.
Capacity utilization in the manufacturing industry
Capacity utilization in July 2021 [%] (circles) and change between July 2019
and April 2020/April 2020 and July 2021 in percentage points
87.1 88.7 85.6 90.1 86.9
41.1
16.7 18.0
11.1 13.7
-8.6 -7.7
-13.5 -12.0
-42.9
Manufacturing Mechanical Automotive Electrical Metalworking
industry engineering industry engineering industry
April 2020 vs. July 2021 July 2019 vs. April 2020
Source: ifo Institut
German Economy 2021 9Business expectations
pointing down
Overall, corporate business expectations nevertheless still
at a high level
After surging back upward, German companies' business expectations
have edged down again but are maintaining a high level similar to that
of 2018.
Expectations in manufacturing in particular remain decidedly buoyant.
Having tended toward a negative outlook long before the current
crisis, the majority of respondents today believe the economy will continue
to improve.
Companies' expectations remain fragile, however, as future macroeconom-
ic development remains very uncertain. The spread of the Delta strain,
the faltering vaccination campaign, rising prices for intermediate products
and unreliable supply chains in some sectors are all curbing hopes of a
sustained upswing.
German companies' business expectations
[Net balances, seasonally adjusted]
30
20
10
0
-10
-20
-30
Macroeconomy
Manufacturing
-40
Services
-50
-60
01/ 01/ 01/ 01/ 01/ 01/ 01/ 07/
2015 2016 2017 2018 2019 2020 2021 2021
Source: ifo Institut
10 German Economy 2021Shortage of intermediate
products slowing upswing…
Electrical engineering and the auto industry in particular
are being hit hard by disruptions and delays in the supply of
intermediate products
Nearly two thirds of Germany's manufacturing companies complained of
a shortage of intermediate products in the second quarter. As things stand,
many manufacturers are still able to draw on stockpiles of products made
in advance to service growing demand. Increasingly, however, these
inventories are running low. The automotive industry above all is struggling
with a shortage of semiconductors from the electrical engineering industry,
which is itself suffering delivery bottlenecks of its own due to a lack of
capacity in chip production.
It is already becoming apparent that, in the automotive industry, the
semiconductor crisis is here to stay for some considerable time. The market
researchers at Gartner assume that certain aspects of automotive will not
recover until 2023 or even 2024, as new production capacity for memory
chips will not come on line until then.
Percentage of companies affected by intermediate product shortages
[in %]
84
Electrical engineering 63
83
Automotive industry 65
79
Rubber and plastic products 71
70
Mechanical engineering 42
Manufacturing 64
45
59
Chemicals 42
35 July 2021
Beverage production 2 April 2021
Source: ifo Institut
German Economy 2021 11…and driving up producer prices
Economists anticipate a further rise in inflation as producer
prices climb
In recent months, producer prices in Germany have increased at the fastest
rate since the second oil crisis in 1982. The Federal Statistical Office reports
that producer prices were up 8.5% in June 2021 compared to the same
month a year ago.
The main factors driving up producer prices are the trend in intermediate
products, which are 12.7% more expensive year on year, and spiraling
energy costs, which were 16.9% higher than in June 2020. And what is
behind the sharp rise in the price of intermediate products? The high prices
of commodities such as timber and steel in particular – a phenomenon
driven by vigorous domestic and foreign demand. A statistical base effect is
apparent in energy prices, which slumped during the first wave of the
coronavirus.
Producer prices are seen as an early indicator for inflationary tendencies.
Many economists fear that part of the rise in these prices will filter
through into consumer prices in the months ahead, leading to higher rates
of inflation.
Producer prices at German companies
[Index, 2015 = 100]
Upstream intermediate products
Manufactured products
Energy
116
114
112
110
108
106
104
102
100
98
96
01/2019
04/2019
07/2019
10/2019
01/2020
04/2020
07/2020
10/2020
01/2021
04/2021
07/2021
Source: Federal Statistical Office
12 German Economy 2021Consumer prices rising their
fastest in 30 years
Year-on-year inflation rate up to 3.8% – due in part to
extraordinary effects
With price rises in July higher than at any time in almost 30 years, fears
of sustained inflation in Germany are growing. Compared to the same
quarter a year ago, prices were up by 3.8%. Moreover, sequential rises in
the inflation rate have been observed practically every month since the
end of 2020.
Part of this uptrend can indeed be attributed to a base effect: Value-added
tax was reduced temporarily in the summer of last year, and the introduc-
tion of a CO2 tax in January 2021 has also pushed up prices. Notwithstand-
ing, there are good reasons to believe that, even when these extraordinary
effects have been digested, the inflation rate will still be higher than it was
before the crisis. Increasing protectionism, climate policy measures that
inflate prices, demographic change and the expansive monetary and fiscal
policies prevalent in many countries are key reasons for this trend.
Trend in consumer prices, 2019-2021
[adjusted for price, in %]
Inflation
in 2021:
4.0 Sequential change +2.6%1 3,8
Year-on-year change
3.5
3.0
2.5 2.3
2.0
2.0
1.7
1.5 1.4
1.0
1.0 0.9
0.8
0.5
0.0
-0.5 -0.3
-1.0 -0.8 -0.8
2019 2020 2021
1
Consensus Economics' expected inflation rate
Sources: Federal Statistical Office, Consensus Economics
German Economy 2021 13Prevailing economic conditions
remain uncertain
Summary of major opportunities and risks in Germany
Economy
Pent-up demand
for leisure activities and consumer goods adds stimulus
Abundant liquidity
on the market averts fears of a credit squeeze
Domestic boom
is being fueled by well-filled order books in Germany
Vaccination uptake
will give us greater control over the infection process
Virus mutations
continue to be a possible game changer
Heavy indebtedness
is augmenting the threat of 'zombified' companies
Rising energy costs
are increasingly putting pressure on the corporate sector
Shortage of intermediate products
will cause further production outages
Source: Roland Berger
14 German Economy 2021Politics
Geopolitical uncertainty has eased
with Trump voted out and Brexit completed, for example
The minimum global tax rate
can lay the foundation for better international
collaboration and prevent a “race to the bottom” in
the arena of tax competition
The forthcoming general election
adds uncertainty about future economic and fiscal policy
Increasing destabilization
is resulting from the polarization of society
Source: Roland Berger
German Economy 2021 15Germany's economic upswing remains fragile A growth surge is expected in the second half of the year Optimistic expectations of a recovery were muted early this year by the third wave of the coronavirus and the associated lockdowns. Not until early summer 2021, when incidence figures fell below the thresholds defined as part of the government's 'emergency brake' strategy, did business leaders begin to return to more upbeat business expectations. The projected upswing is nevertheless being held back by a number of factors. Bottlenecks in the supply of intermediate products, for example, continue to put the brake on production in some industries. Be that as it may, it is reasonable to assume that, on a quarterly basis, GDP will already be back up at pre-crisis levels in the third quarter of 2021. There is still no sign of the much-vaunted threat of a wave of insolvencies. However, the upswing remains heavily dependent on how the pandemic unfolds. Since the associated state of emergency was extended again in August 2021, further restrictions cannot be ruled out. This explains the marked variance in estimates of how the economy will develop from here. While DZ Bank predicts growth of only 2.7% in 2021, Deutsche Bank puts the figure at 4.0%. On average, the responding economists forecast moderate growth of 3.3% in 2021, followed by a further upswing in 2022. 16 German Economy 2021
Growth prospects for the German economy
[GDP growth forecasts for 2021 and 2022]
2021 2022
2.7 DZ BANK
4.8
3.3 ifo Institut
4.3
3.3 Consensus
4.4
3.5 UniCredit
5.0
Deutsche
4.0 Bank 4.2
Source: Consensus Economics
German Economy 2021 17Your contacts
Dr. David Born
Roland Berger Institute (RBI)
OpernTurm
Bockenheimer Landstr. 2-8
60306 Frankfurt
david.born@rolandberger.com
+49 160 744-6500
Steffen Geering
Roland Berger Institute (RBI)
Fürstenwall 172
40217 Düsseldorf
steffen.geering@rolandberger.com
Photos Roland Berger GmbH
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German Economy 2021 19Publisher
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