Nov 06 2020
The COVID-19 pandemic has had a stunning impact on the global economy, and has led to a permanent shift in the operating landscape for millions of businesses. As at 4th November, over 47.4 million cases of COVID-19 have been recorded and over 1.2 million fatalities have occurred globally. At a time when the accelerating spread of COVID-19 is disrupting much of the developed world, IBISWorld has examined how this historic pandemic has permanently shifted the global economic landscape.
This report examines how the COVID-19 pandemic has influenced national economies across the globe, including analysis of GDP, unemployment, consumer sentiment, business confidence, household discretionary incomes, monetary policy and fiscal spending. It looks at the top five industries to fly and fall in each country over the next 12 months. In addition, IBISWorld has investigated the outlook for COVID-19 restrictions and what a return to normal operating conditions will look like.
While COVID-19 may subside if a vaccine is developed and distributed, the economic impacts of the pandemic will likely continue for years to come.
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The COVID-19 pandemic has caused a severe contraction in the German economy. In the current year, real gross domestic product (GDP) is likely to decline by 5.8% compared with the previous year. The significant contraction in German economic output is the result of a comprehensive shutdown of many industries across a wide range of sectors to stop the spread of COVID-19. The lockdown measures were particularly devastating to operators in the manufacturing, business services, trade, transportation and storage sectors, as well as the accommodation and food service activities sector.
The last time such a sharp decline occurred was during the global financial crisis in 2009. In the first half of 2020, real GDP fell even more sharply than in the winter of 2008-09. In the second half of the current year, indication of an economic rebound is anticipated to strengthen real GDP in the coming year. The strength of this recovery will depend largely on how quickly rates of COVID-19 infections decline. Assuming that no further shutdown measures will be implemented for the rest of the year, real GDP is anticipated to increase by 4.4% in 2021.
Over the five years through 2025, real GDP is expected to increase at an annualised 2.0%. While recovery for the global economy looks promising, trade policy disputes between the United States, China and the European Union, and the negotiations on trade agreement between the European Union and the United Kingdom will likely hinder real GDP growth.
With a drop in economic output in Germany attributable the COVID-19 pandemic negatively affecting many sectors of the economy, the unemployment rate has increased in the current year. Compared with the previous year, the unemployment rate is expected to have risen by 1.7%. In particular, the unemployment rate increased exponentially in the first half of 2020.
However, the country’s economic situation has improved noticeably in the second half of the current year, with the government’s economic stimulus package playing a significant role in this development. One key factor to this success is the short-time work allowance, which is a form of government aid that allows employers to switch employees to reduced work hours to maintain jobs. This economic stimulus package is anticipated to stabilise the labour market in the coming year, so that the unemployment rate in 2021 is likely to remain at the same level as in 2020. Moreover, the extension of the short-time work allowance to a maximum of 24 months is anticipated to contribute to this trend.
Consumer confidence index
The consumer confidence index is expected to fall by 2.1% in 2020 due to the COVID-19 pandemic, but also to some extent because of the United Kingdom's withdrawal from the European Union this year. The consumer confidence index in the current year is likely to reach a level comparable with the 2009 financial crisis. Conversely, the index dropped significantly in April and May 2020 due to COVID-19 lockdown measures.
A significant reduction in manufacturing activities has resulted in the government extending its short-time work aid, unemployment figures soaring and private households recording falling disposable income. These trends have caused households to postpone investment plans and decrease consumer spending substantially. Nevertheless, financial aid and economic stimulus measures introduced by the German Government have contributed greatly to improving consumer confidence since June 2020. The temporary reduction in VAT has proven instrumental here. The German economy is slowly recovering, which has already boosted consumer sentiment.
However, the consumer confidence index is only anticipated to increase marginally by 0.3% and remain negative in 2021. Additionally, disposable household income uncertainty and the VAT, which will be back to normal in January 2021, will likely negatively impact the consumer confidence index. The consumer confidence index is forecast to rise only slightly at an annualised 0.3% over the five years through 2025.
Business confidence index
In the first half of 2020, the business confidence index deteriorated dramatically to an all-time low; partially due to the United Kingdom’s withdrawal from the European Union, but mainly due to the COVID-19 pandemic. Furthermore, as Germany is an export-oriented country, the imposed lockdown had a strong negative impact on international trade. In particular, severely restricted trade with China proved to be devastating as China is Germany's most important trading partner in terms of the total value of both exports and imports. As a result, performance in the manufacturing sector deteriorated significantly due to the disruption in supply chains of internationally active companies.
Moreover, the impact of travel restrictions on the tourism and hospitality sectors has been equally severe on business confidence. In the second half of 2020, the business confidence index has shown signs of recovery. Stabilising foreign demand is currently benefiting the manufacturing sector in particular, with measures taken by the German Government to secure liquidity likely to have made a significant contribution to this trend. Despite this positive factor, the business confidence index in 2020 is anticipated to decline by 4.4%. Nevertheless, the business confidence index is projected to improve significantly by 6.7% in 2021.
While the manufacturing sector is expected to steadily recover, demand volatility will likely continue affecting the services sector. Any further lockdown measures would significantly impact this sector. In addition to the threat of a renewed spread of COVID-19, the current trade conflicts between the United States, China and the European Union are having a negative impact on the business confidence index. The business confidence index is projected to rise at an annualised 1.7% over the five years through 2025.
Net monthly household income
Net monthly household income is expected to fall by 5.6% in 2020 as a result of the COVID-19 pandemic. The COVID-19 pandemic has had an enormously negative impact on the German economy, with unemployment figures rising exponentially and German workers suffering large salary losses as employees are moved onto the government’s extended short-time work scheme.
Moreover, as a result of falling revenue figures, many self-employed people and freelancers have experienced a decline in demand for their services, limiting income. For many workers, wage increases were lower this year, with some companies postponing salary reviews. To address these issues, the German Government has introduced some emergency aid measures, including funds to support micro-enterprises and the self-employed. Access to short-time work benefits has also been made easier.
Net monthly household income is expected to increase modestly, at an annualised 2.2% over the five years through 2025. This trend includes an anticipated rise of 0.8% in 2021. The transformation of the economy into a service society over the past five years, with comparatively high wages, is anticipated to continue and contribute significantly to the growth of net monthly household income by 2024-25.
Fiscal support and stimulus measures
To mitigate the negative effects of the COVID-19 pandemic, the German Government has adopted an economic stimulus package worth a total of €130 billion. This economic stimulus package is divided into four different areas and includes measures to support companies, the public sector and private households. In addition, this economic stimulus package is intended to provide impetus for important future technological progress.
To support families and single parents, the government has distributed a one-off child bonus of €300 in the current year. The Federal Government has also made it easier for people experiencing financial difficulties to access basic provisions. For example, for a period of six months, residents are given access to basic protection without having to disclose their financial circumstances. Applications for financial assistance are provisionally approved so support can be quickly provided, with means-testing carried out later. This measure will run until 31 December 2020.
In March, the German Government facilitated the payment of short-time work allowances to support the many companies that had lost business and in some cases were unable to generate revenue. The short-time work allowance scheme aims to safeguard jobs and stabilise the economy during the COVID-19 outbreak. The Federal Employment Agency pays between 60% and 80% of the loss of pay, depending on the length of the short-time work period. For parents, the scheme pays between 67% and 87% of net income. Originally, the short-time work allowance was supposed to run until 31 December 2020, but the scheme has since been extended to 24 months.
In order to stimulate consumer consumption in Germany, the German Government has lowered VAT rates. The regular tax rate of 19% was reduced to 16% and the reduced tax rate of 7%, which applies to food, was cut to 5%. This measure has been in force since 1 July 2020 and will be in effect until 31 December 2020.
In addition to measures directly targeted at private households, the economic stimulus package adopted by the German Government also includes companies. Companies that were doing well before the pandemic and now urgently need support will receive ‘Überbrückungshilfen’ (bridging aid). The German Government has provided €25 billion in the form of grants, which do not have to be repaid. This bridging aid has been available since June of this year, and will run until 31 December 2020.
In addition, companies were granted a tax loss carry-back over a period of two years to compensate for lost revenue. This tax loss carry-back scheme allows companies to offset current losses against earlier profits to an even greater extent. Furthermore, for the tax years 2020 and 2021, companies have been given the option to depreciate movable assets such as machinery on a declining balance basis, instead of the previous straight-line method. This method allows a larger part of companies’ investment expenditure to be immediately tax deductible, therefore reducing taxable profits.
Rising life expectancy and the subsequent increase in age-related diseases have boosted demand for pharmaceutical products. In Germany the median age, which divides the population into two equally large groups, has risen steadily. While the median age in 2000 was 39.8 years, it is currently 46.5 years.
With profit accounting for an estimated 13.7% in 2020, the Pharmaceutical Preparations Manufacturing industry is one of the most profitable industries in Germany. Unlike many other industries, the COVID-19 pandemic has strongly supported industry profit. Industry players produce drugs to treat diseases, and antibiotics to treat infections. In the current year, revenue for the Pharmaceutical Preparations Manufacturing industry is expected to rise by 4.6% in 2020, to €60.2 billion.
However, the industry's strong revenue growth is likely to lose momentum as early as 2021, with revenue anticipated to increase by only 2.6% during the year, to total €62 billion. This result is due to the short-term demand increase for drugs to treat COVID-19 infections. The urgent need to find a treatment to COVID-19 is presenting an expansion opportunity for the industry, with work on developing a vaccine proceeding at full speed. Within the industry, CureVac AG’s activities in creating a vaccine is one of the most promising.
In recent years, increasing public concern over environmental issues and rising health consciousness have benefited the Bicycle & Mobility Equipment Manufacturing industry. In 2020, industry revenue is expected to rise by 7.6%, to total €1.9 billion. Nevertheless, at the start of the year in March and April 2020, industry operators experienced enormous delivery difficulties in the wake of the COVID-19 pandemic. With most bicycle components being manufactured in Asia, supply chain disruptions were caused by extensive closures of manufacturing facilities in China. Demand also fell due to the closure of retail outlets.
However, demand for bicycles has been boosted since May by a significant increase in the use of bicycles for sport and leisure activities. Furthermore, bicycles are also a good alternative to using public transport facilities, where the risk of contracting COVID-19 is higher. In particular, industry firms have reported that sales for bikes in the beginner's range have increased strongly. Additionally, the industry has been able to expand profitability in recent years due to the consumer trend towards higher-priced products. Profit is expected to account for an estimated 5.6% in 2020. In 2021, revenue is forecast to fall slightly by 0.2%, with this slight decrease due to the sharp demand increase in the current year.
The Data Processing & Hosting Services industry is a branch of the technology sector, which has grown rapidly in recent years. Moreover, the COVID-19 pandemic has accelerated the expansion of the industry. In 2020, the industry is expected to achieve a 2.7% growth in revenue, to total €10.2 billion. With many employees working from home due to the COVID-19 outbreak, demand for mobile solutions and cloud services in particular has risen sharply. For example, video conferencing and virtual work environments have been strongly utilised.
However, at the beginning of the year, considerable budget cuts were made in the IT sector. This decision initially resulted in declining revenue for the industry. Industry performance is likely to be much more positive in the second half of 2020, partly due to the German Government launching an extensive economic stimulus package to stabilise the German economy. Industry profit margins are expected to account for 11.1% in the current year, making the industry one of the more profitable industries over the course of the pandemic. Industry revenue is also likely to rise sharply by 4.8% in 2021 as technological progress accelerates rapidly and consumer reliance on the internet grows. In particular, the importance of cloud applications such as cloud computing is anticipated to rapidly gain significance.
Despite strong price pressure from the food retail trade and increasing health consciousness, which is leading to more consumers opting for healthier diets; revenue in the Prepared Meal Production industry is expected to increase by 3.3% in 2020, to €3.5 billion. The COVID-19 pandemic has changed consumer behaviour and eating habits. Restaurants and other catering establishments have had to modify their usual business activities to adhere to the health and safety regulations implemented to combat the COVID-19 outbreak. Prepared meal manufacturers, whose products are mainly sold in supermarkets, have been able to benefit from a growing demand for ready-made meals that can be consumed at home.
Furthermore, the development of premium industry products has supported industry profit margins, which is expected to rise by 3.7% in 2020. However, strong demand for industry products is likely to be only temporary. As additional health and safety measures are relaxed for restaurants and other catering establishments, the demand for ready-made meals is likely to decrease. For this reason, demand for dishes that can be prepared quickly and easily is expected to normalise in the coming year. Therefore, industry revenue is expected to fall by 5.1% in 2021.
The Bread & Bakery Goods Production industry is expected to record a 1.2% growth in revenue to total €19.6 billion in 2020. Industry establishment numbers are forecast to decline as the industry’s larger players focus on increasing market share concentration. Conversely, demand has increased for frozen and long-life food during the COVID-19 pandemic. Large bakeries in particular have benefited from huge consumer demand for fresh and frozen bakery products and products for baking in 2020. At times, demand for bakery products was so high that some producers, such as Harry-Brot, requested that employees work extra shifts.
In addition to an increase in revenue, industry players have also reported increased profit margins, which is expected to account for approximately 3.0% in 2020. However, this trend is unlikely to be sustained for the following year, with profit forecast to slightly decline by 0.2% in 2021. The industry’s revenue performance will depend largely on the extent to which customers in supermarkets comply with current hygiene standards to bring COVID-19 numbers down.
The Motor Vehicle Manufacturing industry has been one of the biggest losers during the COVID-19 pandemic. German car manufacturers had to cut back manufacturing in their Chinese facilities at the beginning of 2020, and automotive suppliers were forced to make significant production cuts. As COVID-19 rapidly spread in March, a large part of production in Germany was shut down. The low demand for cars and an interruption in supply chains have contributed to a steep revenue decline of 22.1% in 2020, to €331.2 billion. Industry profitability is also expected to fall to 1.0% this year.
While revenue for the Motor Vehicle Manufacturing industry is anticipated to recover and increase by 15.1% in 2021, this growth trend will still be far from revenue levels achieved before the COVID-19 outbreak. Nevertheless, demand for cars will likely be supported by an innovation premium for consumers, who receive a bonus of up to €9,000 when they buy an electric car or hybrid with a charging plug. From this premium, the Federal Government will subsidise up to €6,000 for new cars and the remainder is paid by the manufacturer.
The COVID-19 pandemic began to impact the Convention & Trade Fair Services industry early in the year. In March 2020 an increasing number of large events were banned by the state and local governments. This decision was followed by a comprehensive nationwide ban on events of any kind. For example, the Leipzig Book Fair in mid-March, Rock am Ring on the Nürburgring in early June, the Wacken Open Air in July, and the Oktoberfest in Munich in mid-September to early October were all cancelled. Industry revenue is expected to fall by 35.3% in 2020, to €5.9 billion.
On top of suffering an enormous drop in revenue due to the cancellation of events, industry players will likely be unable to absorb all expenditure costs. As a result, industry profit margins are expected to only account for 0.6% in the current year. The development of the industry in 2021 will largely depend on how effectively COVID-19 has been contained. For 2021, the Bremen six-day race, which should have been held in mid-January, has already been cancelled. Nevertheless, revenue in 2021 is projected to increase by 22.2% to total €7.2 billion. However, this revenue figure is far below the levels achieved prior to the COVID-19 pandemic.
Air traffic in Germany has been largely suspended this year to slow the spread of COVID-19. This decision has affected both domestic and international flights. Consequently, revenue for the German Passenger Air Transport industry has sharply dropped by 50.5% since March 2020, to €10 billion. This result makes the industry one of the most negatively affected by the COVID-19 pandemic.
The lack of sales has had a particularly damaging effect on airlines' profit margins. The very high fixed costs combined with low capacity utilisation have led to a negative profit margin of 10% in 2020. As a result, many players are facing serious liquidity problems. Although the government eased lockdown measures in May 2020, industry revenue is expected to remain well below pre-crisis levels in 2021, despite a projected 48.1% growth in revenue compared with 2020. Currently, entry to the United States for EU citizens is still very limited. In addition, Turkey has banned air traffic to Germany because of the COVID-19 pandemic.
The measures taken to control the spread of COVID-19 have had a particularly negative impact on the Cinemas industry. Cinemas were forced to close completely from March to May or June, depending on the local state laws. In the first half of 2020, some of the industry's players were unable to generate revenue entirely. The subsequent reopening of some cinemas has only generated low ticket sales, as operators have had to restrict the number of visitors considerably in order to comply with hygiene regulations.
Another factor that has had a negative impact on the Cinemas industry is the postponement of film releases, where some film companies have cited a halt in film production due to the pandemic. As a result, cinemas have been largely unable to show new films and have relied on classic or independent film viewing. These factors have resulted in the average price achieved via ticket sales being lower than in previous years.
In 2020, revenue for the Cinemas industry is expected to fall by 31.1%, to €1.1 billion. The closure of cinemas in the first half of 2020 and the hygiene measures taken to combat COVID-19 are expected to have contributed to the drastic fall in the industry's profit margin to 1.8% this year. For 2021, revenue is anticipated to rebound strongly by 41.1%. This trend is reliant on the COVID-19 pandemic not being a long term issue next year, and cinema visitor numbers returning to levels prior to the outbreak.
Due to the cancellation of numerous trade fairs and conferences at the onset of the COVID-19 pandemic, the German Hotels industry had already been one of the most strongly affected by the outbreak by February 2020. As further restrictions were enforced from March onwards, which prohibited hotels from offering accommodation for holiday purposes, operating became unviable and forced many industry players to file for bankruptcy. In 2020, industry revenue is expected to fall by 33.2%, to €21.8 billion.
However, the Federal Government has temporarily suspended the obligation to file for insolvency for businesses affected by the COVID-19 pandemic until the end of September 2020. For companies that are overindebted but not insolvent, the suspension of the application obligation is extended until the end of the year. In addition, the KfW loan programme is intended to help industry players bridge liquidity bottlenecks. Another measure taken to support the industry is the short-time work allowance. However, despite government support, many industry players will likely find it difficult to remain viable during the current year, with profit margins forecast to drop to just 3.0% in 2020. In 2021, industry profit is projected to only slightly improve to account for 2.4%. Many holidaymakers and business travellers are likely to remain hesitant to travel in 2021 due to the risk of infection remaining high, further negatively affecting the Hotels industry.
Outlook for COVID-19 Restrictions
As COVID-19 infection numbers continue to surge globally and throughout Germany, numerous events have been cancelled or postponed in 2020. International travel and domestic travel came to a standstill due to a large-scale ban on leisure and holiday accommodation. The Federal Foreign Office has issued travel warnings for many countries. Operators in the Convention & Trade Fair Services industry and the tourism sector are among the hardest hit by the COVID-19 pandemic.
Travel activity for 2021 and the coming years will depend largely on the number of COVID-19 infection cases globally, as well as consumer confidence. Additionally, the performance of the Passenger Air Transport industry will be one of the most important indicators of travel both nationally and internationally. According to the German Air Transport Association, a gradual recovery of the Passenger Air Transport industry is anticipated, although recovery will likely be a long-term process. Assuming that appropriate medication and vaccinations are available in 2021, passenger numbers are not expected to reach 2019 pre-crisis levels until 2024. Domestic traffic is forecast to recover faster than EU traffic. A fully operational resumption of intercontinental transport is projected to take the longest. Over the course of the pandemic, many businesses conducted meetings and events online. This trend is likely to continue after the COVID-19 pandemic subsides, reducing the extent to which workers will need to take business trips and as a way for companies to limit company expenses.
As a measure to contain COVID-19, the German Government, in cooperation with the state governments, has decided that major events should not be held until the end of December 2020 without adherence to hygiene regulations. The associated losses in revenue for the Convention & Trade Fair Services industry are likely to continue to be felt in the following year. Major events will likely not take place before autumn 2021, while medium-sized events are anticipated to return to normal from summer 2021. Smaller events, on the other hand, are likely to resume more quickly. However, normalisation in this area is not expected before spring 2021. Virtual formats may be a potential alternative revenue stream for the Convention & Trade Fair Services industry. For example, the Wacken Open Air, which had to be cancelled this summer due to the COVID-19 outbreak, took place virtually via livestream. Such virtual events can significantly contribute to an industry’s recovery.
Overall, positive signs of rebound from the COVID-19 outbreak are already noticeable from the sports sector. In mid-September 2020, a six-week test phase was introduced where football stadiums could be filled to 20% of available capacity, subject to health and safety measures. Other sports such as ice hockey, handball, volleyball or basketball could have such measures implemented in the near future.