May 2020 – Germany is battling with its most serious recession of post-war times in 2020. How long will it take for the country to recover from the shockwaves caused by the coronavirus? Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, believes it will be some time before we can breathe easy, and is predicting a fundamental change in the organization of globalization.
Dr. de la Rubia, hand on your heart, how bad is it for the global and specifically the German economy?
We are facing the worst recession of the post-war period, and if we are able to survive this crisis as we did the financial and economic crisis of 2008, then we already have to count ourselves lucky.
What sort of percentage losses do you expect to see here and worldwide this year? And how might things progress in 2021?
For Germany, I expect to see the gross domestic product shrink by around seven percent this year. For 2021, I’m predicting a significant upswing in the economy. Nevertheless, unlike some others, I don’t think there’s any chance of a rapid recovery. I think it will take until the end of next year at the earliest for German economic power to be back up to approximately the same level as before the outbreak of the pandemic. And all that will only apply on the condition that the infection rates really do start to fall now, that the easing of restrictions since the start of May can continue, and that there are no new lockdowns to paralyze social and economic life once again.
What do you expect to see in the rest of the world?
With regard to the global economy, I’m cautiously optimistic, since a lot of developing countries are on much steeper growth trajectories than Germany: For the global economy I expect to see a fall of “only” around three to 3.5 percent as a bottom line for the current year. Compared to the financial and economic crisis of 2009, however, that’s still a huge loss: Back then, the global economy shrank by only 0.1 percent.
In the years before the crisis, China was responsible for around 40 percent of total economic growth worldwide. Does the recovery of the global economy therefore depend crucially on how rapidly China, the country of origin of the pandemic, gets back to business as usual?
In actual fact China, alongside the United States, will play a crucial role in the return to the economic normality of pre-corona times. The German economy in particular, with its strong reliance on exports, will struggle to get going if its neighboring states like France don’t recover at the same time, and in particular if demand from the USA and China doesn’t pick up again. With this in mind, it’s encouraging to see that China is a few months ahead of us in dealing with the pandemic and is already making great progress by all accounts. Nevertheless, the losses China suffered during the first quarter were enormous, and that’s not something that can be offset quickly. On top of that, China alone will not be able to drag us out of the quagmire. The country’s economy is tightly interwoven with that of the rest of the world and is dependent on global growth getting going again. This year, the Chinese economy will grow by one percent in the best-case scenario – that still means a tremendous loss compared to the growth rates of previous years, in which the norm has been growth of six or seven percent of the gross domestic product.
What will happen in the financial markets?
When I look at equity markets, I get the impression that investors are currently looking to see things bottom out. Some are even betting on a rise again, while during the first few weeks of the crisis in March everybody wanted one thing only: to get rid of securities. I fear it is still a bit too early, however, for a broad recovery and a resurgence. After all, the truly catastrophic economic data are only coming to light now during the course of the second quarter. This will undoubtedly put pressure on the listings again and once more lead to prices below the 10,000 mark on the DAX. Either way, the share markets are limited in what they can tell us as a source, if we are to predict future economic development in the real economy. What also remains important, as before, is the oil market. Here, the overall mood is currently very pessimistic: Demand has plunged by 25 to 30 million barrels per day – and with it, the price of crude oil. This could go on for some time. The bond markets, too, are an indicator of further economic development, and a look at these tells us that for some time returns have remained firmly pinned to the spot – economic optimism is nowhere to be found.
Are you satisfied with the way politicians have managed the crisis in Germany?
Politicians at both a national and a federal state level are currently doing a lot of things right. In the first stage, it is important to maintain production capacities until hopefully, one not-too-distant day, domestic and foreign demand picks up again. In light of that, the chosen formulas, such as reduced working hours, liquidity credits or, where necessary, (partial) nationalization, are the right ones. There is generous help available, but at the same time politicians have also had to apply the emergency brakes. After all, it would be beyond all sense and purpose and would blow the state coffers completely if they were to try and save every single business. This applies particularly to those companies that had financial problems and susceptible business models before corona. I am critical, however, of the growing resistance within the federal government against helping neighboring European countries ailing in the crisis. We need a kind of European reconstruction fund. Given the strong dependence among medium-sized German companies in particular on the rest of Europe, it won’t help us if only Germany recovers, while the important sales and production locations in Italy, for example, now suffer a similar fate to Greece almost ten years ago.
More and more politicians, researchers, but also increasingly lobbyists, for example from the area of renewable energies, are calling for a “new deal” and a new economic order post-corona, one that is more focused on the environment and public enterprise. Does it not actually seem like a good time to completely remodel the economic structure that now lies in tatters instead of aiming to use state money to recreate the conditions that existed before corona?
There’s certainly something quite captivating about this notion, particularly in light of sustainability and climate protection, but in fact it is far from accurate to assume everything was bad before corona. At the same time, this would be beyond our capacities at this point. The first stage is about maintaining production capacity, as I said, and then ensuring that the crisis in the real economy does not result in a financial market crisis – because this would cause the number of defaulted loans on the balance sheets of commercial banks to rise. Then there needs to be a third step, in which many industries actually implement a rapid transformation in technologies and fundamental approaches. At the same time the public purse, through a clever mix of supply and demand politics, can purposefully promote particular areas – here, I’m thinking not only of the climate and energy transition, but also, most significantly, the areas of digitalization and education .
Will the large number of medium-sized German businesses, if they survive, be able to continue operating as before once the crisis is over?
The corona pandemic has revealed the consequences of entire sectors relying on just a few suppliers. When these are then incapacitated because a virus has stopped production in a particular region, then entire supply chains and cycles collapse immediately. There is one lesson medium-sized businesses and corporations can undoubtedly learn: They need to further expand their supply networks. They will not only build bigger warehouses, but also diversify much more in purchase management, and will in future have five or seven suppliers in place rather than one or two, as has been the case thus far.
So you are not worried that globalization will come to an end like some others?
No, we will continue to rely on the distribution of work and make use of preliminary services from China or Malaysia, for example, only companies will now have to pay attention, wherever possible, to gaining additional suppliers in these regions too and also forging links with regional suppliers on their own doorsteps. On top of this, logistics chains will become more diversified: Companies should not allow themselves to be dependent on one mode of transport and in future will make use of container ships and air freight at the same time, where products allow.