German economy facing worst deficit in 30 years

 Largest European economy has been hit hard by COVID-19

Europe’s largest economy, Germany is facing its first deficit since 2013 after the public sector deficit reached 189.2 billion euros ($225 billion) in 2020 due to the coronavirus pandemic. It is the highest budget shortfall since the German reunification three decades ago, the Statistics Office said.

Public spending rose 12.1% to 1.7 trillion euros in 2020 as the government pulled out all the stops to offset the impact of months of lockdown, while tax take fell 3.5% to 1.5 trillion euros, the statistics office said on Wednesday.

The spending spree is set to continue, with German Finance Minister Olaf Scholz last month promising to do whatever was needed to enable Germany to spend its way out of a coronavirus-induced economic slump.

Germany is struggling to control a third wave of the pandemic and is set to keep many businesses, like bars and cinemas, closed until at least later this month. More than 77,000 people have so far lost their lives in Germany as COVID-19 pandemic spread across country.

The lockdowns and restrictions imposed to stop the spread of COVID-19 have badly affected the economy. The German economy was already experiencing a slowdown before virus hit the economy hard. The German economy shrank by 5% in the pandemic year 2020, ending a decade of growth as lockdowns wiped out much business and consumer activity.

The continue demand from China has saved some manufacturing sectors from severe crisis. Without early recovery in the Chinese economy, the contraction in German economy could have been even worse.

  The state statistics office Destatis said Thursday that only the construction sector showed an upturn as industry and services saw deep declines. Agriculture, financial services, real estate and information and communication suffered smaller drops in output.

Germany’s economy did better than several others in the 19-country Eurozone as it was supported by manufacturing, which has taken less of a hit than services. The downturn was smaller than in France, which according to European Commission estimates cited by Destatis, shrank 9.4%, Italy, which was down 9.9%, and tourist-dependent Spain, off 12.4%.

The pandemic downturn, which followed 10 straight years of annual growth, was smaller than that experienced during 2009, when the economy shrank by 5.7%. The 2020 figure compares to modest growth of 0.6% in 2019.

However, the number of people on shortened working hours declined last month, driven by the industrial sector, which is benefiting from robust exports, the IFO institute said on Wednesday.

Companies can shorten workers’ hours under a government scheme designed to avoid mass layoffs during the downturn by offering companies subsidies to keep workers on the payroll.

In March, 2.7 million employees were on shortened hours, down from 2.9 million, IFO estimated. The number of people on the scheme peaked at about 6 million a year ago but had been rising steadily since Germany entered its second lockdown late last year.

                                             Khalid Bhatti