Corona Crisis and Germany

• Worst economic downturn in postwar period
• European Commission – country back on economic track by 2022
• Record package of financial support measures
• Global recovery only possible when coronavirus is contained
• Global FDI perspectives

Worst economic downturn in postwar period

The German economy experienced its worst recession in the postwar period as a result of the coronavirus pandemic. However, Germany’s economic downturn will be less severe than previously expected. The country is again doing its best to halt the spread of Covid-19 as cases rise again.

Germany’s relative success in containing the coronavirus during the summer paid economic dividends, with the low point of the recession already passed in May. Since then, the monthly indicators have shown clear signs of recovery.

Gross domestic product increased by 8.2 percent in Q3/2020 compared with Q2/2020. This growth was driven by higher private consumer spending, increased investment in equipment and a sharp rise in exports.

European Commission – country back on economic track by 2022

According to new data from the European Commission, Germany will experience a fall in GDP of 5.6 percent in 2020. Earlier forecasts predicted a GDP slump of at least 6.3 percent. In 2021 and 2022, large catch-up and carry-over effects should buoy the German economy, with a projected GDP increase of 3.5 percent and 2.6 percent respectively - allowing Germany to reach its pre-crisis level in 2022. 

Record package of financial support measures

Germany’s government moved swiftly to counteract the worst effects of the crisis, introducing a far-reaching package of financial measures to safeguard health, jobs and the economy. The record aid package includes a supplementary government budget of EUR 156 billion to absorb the immediate consequences of the crisis. The complete program of help measures – including guarantees and subsidized KfW bank loans – planned represents EUR 1.2 trillion in total. By moving quickly and decisively to mitigate the worst outcomes of the crisis, Germany’s government has created the conditions to ensure that businesses – of all sizes – emerge from the crisis intact. 

Germany was one of the safest investment locations worldwide before the global coronavirus pandemic. The country’s strong and stable economy now puts it on a strong footing to deal with the ongoing Covid-19 crisis. The record financial aid package– with further measures foreseen as and when required – is a sign of the German government’s commitment to ensuring that the country maintains its proud position.

Global recovery only possible when coronavirus is contained

A global recession now seems certain, with economic recovery only possible when the virus can be effectively contained. According to the OECD, a sharp slowdown in world growth was expected for the first half of the year as supply chains and commodities were affected, tourism fell away and business confidence faltered.

Global FDI perspectives

UNCTAD reports that the outbreak and spread of Covid-19 will negatively affect global foreign direct investment (FDI) flows in the period 2020-2021. Downward pressure on FDI will be in the range of 30 to 40 percent according to new forecasts. Developed countries in particular will feel the effect of this downturn as a result of their dependence on global supply chains.

Sectors expected to experience the greatest decline in FDI levels include aviation, tourism, entertainment, retail trade, and luxury goods. The automotive, consumer goods and IT sectors should experience minimal decline, with biotechnology, e-commerce, digital technologies, and y recording FDI increases according to some forecasts.

• The economic stimulus and crisis management package
• Support for small and medium-sized companies
• Liquidity aid loan programs
• More flexible rules for short-time allowance schemes
• Tax policy measures

The country’s economy is in a strong position to introduce measures supporting the economy over a prolonged period. By providing businesses with sufficient liquidity, the government measures will help ensure that enterprises emerge from the crisis intact.

The economic stimulus and crisis management package

The German federal government has agreed on an economic stimulus package worth EUR 130 billion. The program (Future Package) includes a number of measures to foster economic growth and investment in Germany.

Foreign investors wishing to invest in Germany can benefit in particular from funding in the areas of mobility, medical devices, CO₂ reduction, digitalization and artificial intelligence. 

All measures will improve the general environment for companies, ensuring Germany remains highly attractive to foreign investors.

Support for small and medium-sized companies

As of September 1 2020, small and medium-sized companies and freelance workers from all areas of business are entitled to non-repayable liquidity aid grants - called a "bridging allowance" -  from the German government for the months up to June 2021. 

Companies must apply using a registered accountant or tax advisor. The aid is designed to cover fixed costs of businesses which remain locked down, or remain significantly impacted despite the partial opening of some economic sectors.

The bridging allowance reimburses a share of:

• 90 percent of fixed costs for companies with more than 70 percent decline in revenue,
• 60 percent of the fixed costs for companies with a decline in sales between 50 percent and 70 percent,
• 40 percent of fixed costs for companies with​ a decline in sales between 30 percent and less than 50 percent

in the month of aid distribution compared to the revenues of the corresponding month of the previous year, up to a maximum of EUR 50,000.

Companies directly affected by the second lockdown in November and December who were forced to stop operating, or their suppliers who lost more than 80 per cent of revenue from the stop in operations, may claim up to 75 percent of year-on-year revenue.

In December 2020, the bridging allowance has been revised (bridging allowance III):

All companies that show a decline in sales of at least 50 percent in two consecutive months in the period from April to December 2020 or in the entire period of an average of at least 30 percent compared to the corresponding period of 2019, will receive a subsidy for fixed costs of up to EUR 200,000 per month for any month between December 2020 and June 2021 in which there was a decline in sales of at least 30 percent. 

Alternatively, there are different rules for companies that are affected by closings and those that are not affected:

Companies affected by closings in any month from December 2020 to June 2021 who show a drop in sales of at least 30 percent, will receive a fixed cost allowance retrospectively for any affected month of up to EUR 500,000.

Companies not affected by closures who, in any month between November 2020 and June 2021, suffer sales declines of at least 40 percent will receive a fixed cost subsidy for the respective month of up to EUR 200,000 per month.

Applications for the bridging allowance III will be available during January 2021.

​Further information, including exclusion criteria, is provided here (in German only).

Liquidity aid loan programs

The federal development bank KfW has expanded and eased access and terms on two existing loan programs:

• the ERP-Universal Start-up Loan
• the KfW-Entrepreneur Loan

KfW has introduced a variety of special programmes to suit companies of different sizes and ages. These programmes include generous terms and conditions on consortial financing for larger projects, as well as emergency liquidity aid for SMEs, micro-enterprises and freelancers/self-employed persons experiencing financial difficulties as a result of the corona crisis.

Please refer to the KfW website for details on loan program conditions. Applications for all these can be made through high-street banks.

At the same time, both federal and state governments are setting up a variety of aid programs to support companies in Germany. The range of services is continuously being updated and expanded. The Federal Ministry for Economic Affairs and Energy provides an overview of all state programs (so far in German only). If you have any questions, please do not hesitate to contact us.

More flexible rules for short-time allowance schemes

The Federal Employment Agency pays the short-time allowance as partial compensation for a loss of earnings caused by a temporary cut in working hours. This reduces the costs faced by employers in the context of employing workers, and enables companies to continue to employ their workforce even in the event of a loss of orders. In other words, short-time allowances help to prevent dismissals.

Currently short-time allowances schemes can be granted on a more flexible basis for a limited period until December 31, 2021. For instance, companies are eligible to apply, if 10 percent of the employees are effected by shorter working hours. Moreover, social security contributions which have to be paid solely by employers for employees working short-time are reimbursed in full until June 2021.

Tax policy measures

Tax measures improving companies’ liquidity situations have been decided. For instance, options for deferring tax payments and reducing prepayments will be enhanced. Enforcement rules will also be adapted - there will be no foreclosures or late payment fines, if the debtor of a pending tax payment is directly affected by the coronavirus.