Germany’s economy is healing. Here’s why that’s good news for the UK

After a V-shaped recovery, says Hamish McRae, it’s not unrealistic to expect a series of better-than-expected outcomes in other countries in the coming months

The German government has revised its estimate of economic contraction this year from 6.3 per cent to 5.8 per cent (Getty/iStock)

Germany seems to be set for a V-shaped recovery. That is good news for Germany, of course, but it is also good news for its trading partners, particularly in northern Europe, and indeed for the world economy as a whole. Germany is the world’s third-largest exporter of merchandise after China and the US – and, very relevant to the rest of the world, it is the second-largest importer.

Yesterday, the German government revised up its estimate of growth for this year – or rather revised down its estimate for shrinkage – from minus 6.3 per cent to minus 5.8 per cent. It may sound a bit desperate to welcome what is still a very grave recession, but that forecast compares with an estimate by the IMF of minus 7.8 per cent in the most recent World Economic Outlook. You can’t read from this that other countries will also do better than the IMF has forecast, and it may well be that growth next year will be correspondingly less strong than expected. But better than expected news is a relief at a time like this.

“We are looking at an unexpectedly fast V-shaped recovery,” Peter Altmaier, the German economy minister, said at a press conference announcing the new forecasts.

What Germany seems to have been able to do is to replace export demand with home demand. Exports are forecast to be down more than 12 per cent this year and imports down 8 per cent, but home demand is expected to be down only 3.6 per cent.

This makes sense. We have all tended to put off buying goods, many of which will be imported, and have spent money instead on domestic services, be that at restaurants or wherever. What will take some months to become clear is whether a manufacturing-oriented economy such as Germany will come through this in better shape than those that are service-oriented, such as the US and the UK, the largest and second-largest service exporters in the world. The UK appeared to have a particularly serious downturn in the second quarter but those figures are likely to be revised upwards, and the third quarter will show decent growth.

We can’t yet be fully confident that the “so far, so V” assessment for the UK by Andy Haldane, the Bank of England’s chief economist, is right, but this German experience fits in with his relative optimism.

Decent German growth is particularly important for northern Europe, but it does not help southern Europe so much. Indeed, it looks as though one of the features of the not-so-bad domestic German economy has been that more people have taken their holidays at home rather than travelling to the Med.

That is a similar pattern to the UK – with the added factor that US holidays for Britons are impossible in the foreseeable future. For what it is worth, the IMF has been predicting a decline this year of 12.8 per cent for both Italy and Spain. It would be nice to think that they too, like Germany, will be able to do rather better than the IMF predicted, but there is not much evidence yet to suggest that they will.

Nor, I am afraid, is there much solid evidence as to whether or not the US will stage a V-shaped recovery. Or rather there is too much data, nearly all of it conflicting. The IMF expected it to have a similar dip to Germany, down 8 per cent. The Federal Reserve has not formally updated its forecast of a couple of months ago of a 6.5 per cent contraction this year, but staff minutes suggest that the Fed is worried about the second half of this year. However, I see that respected forecasters in the private sector including the Conference Board now expect a decline of 5 per cent this year. Past experience of US recessions suggests that it will bounce back strongly, but everything has become so political that I think it makes more sense just to wait and see.

The big message, however, is this: economies are healing. In Germany, that is particularly clear, but it would also be realistic to expect a series of better-than-expected outcomes in other countries too in the coming months. This is still a very early recovery stage, but it is a clear recovery and let’s say it again: that is a bit of a relief.