German Gloom Deepens With Harsh Recession, Lockdown Looming

·4 min read

(Bloomberg) --

Germany’s economic and social crisis deepened as the government forecast that the coronavirus pandemic would lead to the biggest output contraction in more than a decade while it grappled with how to prevent containment efforts tearing at the social fabric.

The finance ministry estimates that the economy will shrink by at least 5% this year, according to people familiar with the figures. That compares with the current official forecast of 1.1% growth and would represent the biggest contraction since the financial crisis hammered Europe’s largest economy.

The internal forecast was used to calculate a 156 billion-euro ($167 billion) supplementary budget that Finance Minister Olaf Scholz plans to present this week. The spending plan foresees lower intake of 33.5 billion euros and 122.8 billion euros in more expenditures from measures from company loans to social benefits to cushion the blow, Bild newspaper reported.

Economy Minister Peter Altmaier is due to speak with Germany’s leading economists in the coming days to assess the impact of the virus on growth. The government originally planned to update its expectations at the end of April but accelerated the discussions.

Amid the deepening fallout from the crisis, Angela Merkel is at odds with some German states about how best to contain the spread of the virus, which has so far infected almost 22,000 people in the country, according to Bloomberg data. The chancellor is against a rigid lockdown, fearing that such a measure could backfire, according to a person familiar with her thinking.

Merkel is holding a video conference with leaders of Germany’s 16 states on Sunday afternoon to hammer out a more coordinated approach. Berlin and Hamburg have more relaxed restrictions on residents than Bavaria and Saarland. The German leader is worried that the disjointed measures will cause confusion and lead to people migrating from one state to another to take advantage of looser rules.

In a meeting with government officials this week, Merkel voiced skepticism that a full lockdown could revive memories of the former East German dictatorship, said the person who asked not to be identified because the deliberations are confidential.

Lockdown Concerns

Merkel indirectly addressed the issue in a TV address on Wednesday when she referred to her own experiences in communist East Germany.

“Let me assure you: For somebody like me, for whom the freedom of movement and travel has been a hard-won right, such restrictions are only to be justified in a case of absolute necessity,” she said in a rare speech to the nation.

Amid discussions of even harsher confinement measures, Merkel worries that a lockdown could drive people further into isolation, especially the elderly and the unemployed and that this could lead to a loss of control, the person said. Meanwhile, state leaders fear that they might be forced to give away authority if they fail to contain the spread.

There were signs Sunday that citizens are respecting the restrictions on public life. Police in Berlin said on Twitter that “an unbelievable number of people have clearly recognized the seriousness of the situation” and there are “noticeably fewer people out and about in the city.”

The government had warned that it would be monitoring behavior this weekend and stricter measures could be enforced if people were still out socializing in groups.

As part of its efforts to combat the crisis, the German government asked domestic car manufacturers such as Volkswagen AG and Daimler AG to consider producing medical equipment such as masks or ventilators.

The request forms part of wider efforts by authorities to tap engineering and production resources and tackle severe supply bottlenecks in critical medical equipment, according to people familiar with the matter, who asked not to be identified because the talks aren’t public.

But such production tasks aren’t possible for most businesses. Germany’s DIHK industry lobby urged the government to take action to ensure companies can quickly access bank loans to help them cope with a collapse in demand.

Otherwise, “we will experience an unprecedented wave of bankruptcies,” DIHK President Eric Schweitzer said in an emailed statement. “In this situation, it will only help if the government secures all financial support with a 100% state guarantee. Then the banks can distribute the money immediately and with favorable rates of interest.”

(Updates with German cases in fifth paragraph, DIHK comment in last)

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