The economic fallout from a virus second wave

Germany's economy has deftly maneuvered through the first stage of the coronavirus pandemic, thanks in part to an unprecedented €750 billion ($868 billion) aid package that sought to prevent insolvencies, mass layoffs and a rise in poverty.

Low-interest loans to companies, an expansion of wage subsidies for furloughed workers and state aid for corporate giants like Lufthansa have all lessened the financial shock sparked by the health emergency.

Just as Germans thought their economy was out of the woods, however, a potential second wave of infections is now being predicted. If it comes, scientists say it will likely arrive in the fall or winter, just as many domestic economic stabilizers are due to run out. The second wave could also hit amid a new round of protectionism against Europe from Washington, depending on the result of the US presidential election, and as the UK exits its Brexit transition period, potentially without an EU trade deal. 

"Germany is a very open economy that depends on imports and exports. Therefore, an uncontrolled Brexit and new US-style trade restrictions are a significant threat for wealth," Hubertus Bardt, head of research at the Cologne-based German Economic Institute, told DW.

Germany doesn't even need to be hit itself by a large upsurge of infections. A second wave in other parts of the world could see the order books of the country's industrial giants dry up again. In April, German exports dropped by almost a quarter, following a 12% decline in March.

Insolvencies delayed

Aside from the geopolitical concerns, a potential second wave could strike just as a temporary change to Germany's insolvency law, which allows companies to put off declaring bankruptcy, runs out at the end of September. The measure is predicted to have saved at least 30,000 firms from closure.

"We should expect a rising number of insolvencies in October," Stefan Kooths, head of forecasting at the Kiel Institute for the World Economy told DW. He criticized the measure, saying it had only prolonged the restructuring of stressed companies.

Kooths and Bardt both see as impossible the prospect of a second nationwide lockdown, on the scale of the first in March and April as the economic impact would be dire. Fortunately, businesses have "learned how to operate with the virus threat," Bardt said, and have implemented social-distancing measures that allow production lines to continue to run, albeit with reduced capacity, and which has added to their costs. 

All ammunition deployed in first wave

The scale of the German government's initial intervention has raised questions about what stimulus measures are left if there is a resurgence in coronavirus cases or whether all its ammunition used up in the first wave. In many cases, corporate loans will have been spent without the necessary return on investment, and may still not have shored up a company's finances. For consumers, can a 3% VAT (sales tax) cut from 19 to 16% which began earlier this month, be realistically repeated or beaten?

"In our reading, the government has fired it [the ammunition] in the wrong direction," Kooths told DW, referring to a €130 billion stimulus program launched as the lockdown was eased in May. "All those stimulus measures were aimed at stimulating private consumption when the problem was not a lack of income for most people, but the lack of ways to spend it."

Germans have built up more than €100 billiion in additional savings from not spending on socializing, shopping and travel during the strict lockdown and as a result of the government's generosity. The most fragile part of the economy, however — the corporate sector — still needs stronger stabilizers in the form of state subsidies as well as loans, Kooths argued, after all more jobs are at stake if corporations and industrial giants fail.

"This unprecedented approach will be more robust even against a second, more severe, round of infections because it would give companies the support they need — some sectors will be hit harder — so this will act as a counterbalance across the private sector," he said.

Reduced working hours for how long?

Germany's reduced-hours working scheme, known as Kurzarbeit, has helped many companies stay afloat. The government subsidizes the wages of workers, whose hours are cut rather than being laid off. Some 12 million workers were put on the program between March and June, about 90% more than during the 2008/9 financial crisis. 

The program currently runs until the end of the year and is likely to be extended. Although the program is now recognized as the gold standard of labor market instruments in times of crisis, it comes at a huge cost to the public purse. "[Kurzarbeit] has given corporations some relief, but it can't substitute for all the losses that they are running. It won't solve all their problems," Kooths said.

Predictions of a severe second wave make uncomfortable reading for many Germans, who have got quickly used to their government stepping in to protect them from the worst effects of the health crisis. But even Europe's largest economy cannot mitigate all the negative effects of the pandemic.

"There aren't unlimited funds for fiscal spending," Bardt warned, predicting that layoffs would increase if there was anything like a repeat of the spring lockdown as it would be "difficult for companies to keep employees on the payroll if they would likely not work for a longer period of time."