Germany's economic slump previews Europe's challenge

Frankfurt

GERMANY'S economy shrank the most in at least half a century in the second quarter, outlining the scale of the challenge facing Europe after the devastation of coronavirus restrictions that slammed businesses.

The 10.1 per cent drop in output in the region's largest economy is a harbinger of worse figures elsewhere. Spain, France and Italy will probably report even deeper contractions on Friday, reflecting a recession that prompted an unprecedented policy response from governments.

While indicators show that a rebound is already underway, the threat of job losses as well as mounting concerns about a resurgence in Covid-19 outbreaks risk slowing the return to pre-pandemic levels.

Companies across Europe have seen sales plunge, and many are cutting jobs to streamline for a prolonged period of weaker demand in their sectors. Aviation and travel have been particularly hit, and Airbus on Thursday said it would pare back production. Volkswagen cut its dividend after it recorded a first-half loss, though the German carmaker expects a gradual recovery to continue in the second half.

In Germany, consumer spending, exports and investment all fell in the second quarter. The pace of the rebound will rely in part on the effectiveness of the government's 130 billion euro (S$210 billion) stimulus approved in June and how fast demand for German exports picks up. But the outlook is hugely uncertain, even after an unprecedented European Union fiscal deal championed by Germany and France.

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Bloomberg economist Jamie Rush said: "We estimate that social distancing rules, together with consumer and corporate caution, will put a ceiling on the recovery of 3-6 per cent compared with pre-crisis norms. Weak external demand is also likely to be a limiting factor, with many parts of the world struggling to get the virus under control."

A similar picture is playing out across the euro zone, where governments have stretched their budgets on health and welfare spending, and the European Central Bank launched an emergency bond-buying programme to get the economy through the crisis. Job cuts remain a major risk. BLOOMBERG