Industry is recovering, service providers are suffering

Iron foundry

The mood in the industry has gotten better and better since the summer.

(Photo: dpa)

Berlin The mood in the German economy has turned negative with the sharp rise in the number of infections. The Ifo business climate index fell in October for the first time in five months, from 93.2 to 92.7 points.

The 9,000 business leaders questioned assessed the current situation slightly better. However, expectations for the next six months have clearly deteriorated: this index has fallen from 97.4 to 95.0 points.

The industry in particular was more satisfied than before. In the manufacturing sector, satisfaction with factory utilization increased. However, they were less optimistic about the future than they were in September.

Services saw the most significant setback. In this sector, optimism for the future has disappeared, said Ifo President Clemens Fuest. Retailers are also more pessimistic about the coming months. The mood is even worse in the construction sector.

Until last week there was still confidence in the German economy that the strong recovery of the summer would continue in the fourth quarter. However, the more the number of new infections rose in Germany, the more uncertainty was felt, especially in all industries that rely on personal customer contacts.

Restaurants, culture, events and tourism, the “social consumption” sectors, have not been able to recover since the corona pandemic began in March. Due to the exit restrictions in the cities, they are now experiencing another setback.

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Industry sentiment “tinged with optimism”

As the Federal Statistical Office announced on Monday, for example, sales in the hospitality industry between March and August were 40.5 percent below the previous year’s level in real terms. While revenues fell the most in April at a good 68 percent, they only fell by 22 percent within a year after the temporary relaxation of restrictions in August.

On the other hand, the mood in the industry has been getting better and better since the summer and at the beginning of autumn it is “quite optimistic”, as Michael Hüther, director of the employer-related institute of the German economy (IW) put it.

An important leading indicator, the IHS-Markit purchasing manager index, indicated robust growth for Germany on Friday. Accordingly, the upswing has not even slowed down.

German economists are also observing that the contact restrictions and mini-lockdowns introduced in almost all other EU countries since September have not yet affected industrial companies here. The contacts necessary in business life, including business trips, are still possible.

However, the economic situation looks worse for the euro zone as a whole: According to the purchasing manager survey by IHS-Markit, economic output is shrinking slightly for the first time since June.

Things went particularly badly in France, where the second corona wave had started much earlier than in this country.

IHS Markit economist Chris Williamson observes a “two-speed economy” across Europe: The industry is growing faster than it has been since the beginning of 2018 – although there have been stricter exit restrictions in many EU countries for weeks. The service sector, on the other hand, is suffering more and more from the tightened corona restrictions.

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The second break-in did not materialize – so far

In any case, in autumn all economic watchers in Germany raised their forecasts for this year. The International Monetary Fund is now “only” expecting a decline in economic output of six percent for Germany. The five largest economic research institutes expect the gross domestic product (GDP) to shrink by 5.4 percent.

The federal government expects GDP to decline by 5.8 percent – but it will probably also increase its forecast slightly on Wednesday of this week, Economics Minister Peter Altmaier (CDU) indicated last week.

At the weekend, however, Altmaier limited his optimism: Whether Germany will achieve growth of more than four percent next year depends very much on whether the second corona wave can be broken in the next few weeks.

In their joint forecast, published on October 14, the five major economic research institutes still assume that the economy in this country will grow by 2.1 percent in the fourth quarter after a plus of 6.5 percent in the third quarter.

“It may be that the growth rate turns negative if the infection process does not slow down,” said Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW). But he doesn’t believe it yet. But he could imagine that “growth will drop to zero”.

The economic picture would change fundamentally if borders and schools were closed again. In the spring, the border closings within the EU had significantly hindered deliveries, so some production was shut down.

Felbermayr considers it extremely important that schools and daycare centers remain open, because then employees will not be absent again for childcare as in the spring lockdown.

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