Corona

The pandemic has posed unprecedented challenges to society and the economy. What is the best way to stop the virus without permanently damaging the economy?

Dossier

 

In a nutshell

In January 2020, the novel lung disease COVID-19 became an epidemic in China. Within the space of two months, the World Health Organization had declared it a pandemic, and the global economy was in its grip. As in many other countries, Germany’s public life and parts of its economy shut down for several weeks due to state-imposed contact restrictions. As the lockdown ended and the summer came, the spread of the virus appeared to have all but stopped. But in the fall the pandemic’s second wave inundated Germany; a third wave followed in spring 2021. Of all the areas of the economy affected by the virus, the service sector was hit hardest.

The longer the contact restrictions persisted, the greater their toll on society. In addition to massive government spending on short-time work and emergency aid to companies on the verge of bankruptcy, the restrictions limited participation in education, especially for disadvantaged children and young people, and have dampened the mood of a society cut off from social encounters, family celebrations and cultural life. Since vaccinations began in early 2021, there’s been some light at the end of the tunnel. Nevertheless, Germany will have to live with the virus for many months to come. That is why it needs a strategy that restores normal life and economic activity without letting infection numbers get out of hand. This will require an intelligent combination of vaccinations, testing, and individual responsibility.

Our experts

All experts, press releases, publications and events on the Corona crisis

Since the start of the pandemic, IWH economists have carefully studied its economic effects in the short and medium term. They have analysed the pandemic’s development, the measures introduced to slow viral transmission, and the consequences for the economy in Germany, Europe, and the world. Their reports appear in IWH’s quarterly economic forecasts, in the half-yearly joint economic forecasts set up together with the other German economic research institutes, and in the IWH Flash Indicator forecasting the upcoming quarter.

Recently, using a model that describes the relationship between economic mobility and infection rates, IWH researchers estimated that the relaxation of containment measures in March 2021 increased economic mobility in Germany by 10% and the number of infections and deaths by 25% each.

In General, IWH believes that the best economic policy is the successful containment of the pandemic. For instance, its researchers support the government taking on debt to finance state aid during the crisis. But they argue that money should be used to help areas of society and the economy that are actually hurting instead of using it to stimulate general consumption, as with the decision to lower sales tax last year.

Is a wave of bankruptcies imminent?

The bankruptcy rate is a good way to measure the economic impact of the corona crisis. A company’s involuntary exit from the market brings job losses and leaves supplier high and dry, which can induce chain reactions in other companies. A recent IWH Policy Note explains the significance of bankruptcies as an economic indicator and how to measure them with only a short time lag.

In May 2020, shortly after the first corona lockdown, the IWH’s bankruptcy research unit launched the IWH Bankruptcy Update, a well-regarded monthly source of pandemic-related economic information. Two months ahead of official government statistics, it provides and interprets data on bankruptcies in Germany. In the summer 2020, the IWH noted an increase in bankruptcies among large companies. Since then, bankruptcies have remained almost entirely below pre-crisis levels. IWH has not detected a looming wave of bankruptcies in the data, though the true number of insolvent companies may be concealed by state aid and the suspension of the obligation to declare bankruptcy.

Another Policy Note compared bankruptcies in 2020 with the long-term decline in insolvencies that began before the crisis. Based on the relationship of past bankruptcies to short-term economic developments, IWH researchers provided a prognosis of insolvencies in response to the corona shock. They then found that the actual number of bankruptcies was far lower – an indication of the effect of state aid and the suspension of the obligation to file for bankruptcy. The study also showed that most of the bankruptcies were concentrated in industries especially affected by the pandemic.

The crisis has jeopardised financial stability

Unlike the global financial crisis in 2008–2009, which originated in the financial sector and then spilled over into the rest of the economy, the corona crisis directly hits the real economy. Yet if many companies become insolvent due to the crisis, banks can be put at risk. In its June and July 2020 Policy Notes, the IWH pointed to this danger and projected its potential magnitude in various scenarios. It found that even if the economy recovers swiftly – an optimistic assumption – dozens of German banks could face insolvency as a result of loan defaults. Institutions that are particularly vulnerable are cooperative and savings banks that finance hard-hit sectors such as retail and hospitality. In some German regions, many banks were both undercapitalised and held credit portfolios full of borrowers greatly affected by the corona crisis.

When banks are in trouble, the supply of credit for companies starts to run dry, which can trigger a second-order recession. So far, generous government aid for companies has prevented massive credit defaults. But this has produced a growing number of zombie companies that have come to depend on money from the state. At some point, a wave of insolvencies will come. Germany’s banking supervision must work to strengthen the capital base of at-risk banks. Otherwise, the state will once again have to use taxpayers’ money to bail out banks without systematically restructuring their credit portfolios.

We need a new corona strategy

After the first wave of the virus in the spring 2020, IWH President Reint Gropp called for comprehensive testing for the working-age population and protective isolation for risk groups to give people some normalcy again. At that time, a vaccine was not yet in sight. Now, the vaccination campaign is underway, and, together with rapid tests, constitutes a pillar of the pandemic response. State control must eventually give way again to individual responsibility. The lockdown is a blunt instrument and it no longer reflects the needs of the moment. When extended indefinitely, it damages the economy, undermines educational opportunities, increases social inequality, endangers mental health, and erodes trust in democracy.

Publications on the Corona crisis

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Corona Shutdown and Bankruptcy Risk

Oliver Holtemöller Yaz Gulnur Muradoglu

in: IWH Online, No. 3, 2020

Abstract

This paper investigates the consequences of shutdowns during the Corona crisis on the risk of bankruptcy for firms in Germany and United Kingdom. We use financial statements from the period 2014 to 2018 to predict how pervasive risk of bankruptcy becomes for micro, small, medium, and large firms due to shutdown measures. We estimate distress for firms using their capacity to service their debt. Our results indicate that under three months of shutdown almost all firms in shutdown industries face high risk of bankruptcy. In Germany, about 99% of firms in shutdown industries and in the UK about 98% of firms in shutdown industries are predicted to be under distress. The furlough schemes reduce the risk of bankruptcy only marginally to 97% of firms in shutdown industries in Germany and 95% of firms in shutdown industries in the United Kingdom in case of a three-month shutdown. In sectors that are not shutdown under conservative estimates of contagion of sales losses, our results indicate considerable risk of widespread bankruptcies ranging from 76% of firms in Germany to 69% of firms in the United Kingdom. These early findings suggest that the impact of corona crisis on corporate sector via shutdowns can be severe and subsequent policy should be designed accordingly.

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Konjunktur aktuell: Wirtschaft stellt sich auf Leben mit dem Virus ein

Arbeitskreis Konjunktur des IWH

in: Konjunktur aktuell, No. 2, 2020

Abstract

Die Weltwirtschaft befindet sich im Sommer 2020 in einer tiefen Rezession. Auslöser ist die Corona-Pandemie: Regierungen haben überall in der Welt eine Vielzahl von Möglichkeiten der Mobilität und des Zusammentreffens von Personen unterbunden. Etwa seit Mai werden die Restriktionen in etlichen Ländern wieder gelockert. Für den zeitlichen Verlauf der Rezession ist neben den Lockerungen vor allem das Krankheitsgeschehen selbst maßgeblich, das in Asien sehr deutlich und in der Europäischen Union spürbar zurückgegangen ist, kaum jedoch in den USA. Alles in allem dürfte der Produktionseinbruch in der Welt im ersten Halbjahr 2020 deutlich tiefer sein als infolge der Finanzkrise im Winterhalbjahr 2008/2009.

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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!

Reint E. Gropp Michael Koetter William McShane

in: IWH Online, No. 2, 2020

Abstract

The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.

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Kommentar: Das Corona-Dilemma

Reint E. Gropp

in: Wirtschaft im Wandel, No. 1, 2020

Abstract

Die Politik steht zurzeit vor einem scheinbar unlösbaren Dilemma. Einerseits sollen die Infektionszahlen niedrig gehalten werden: um die medizinische Infrastruktur nicht zu überfordern, und weil in Abwesenheit einer wirkungsvollen Behandlung Menschenleben gerettet werden sollen. Andererseits wäre aber die Ansteckung großer Teile der Bevölkerung (jünger als 60 Jahre und ohne Vorerkrankungen) vielleicht sogar erstrebenswert, weil die Symptome bei dieser Gruppe ohnehin kaum bis gar nicht wahrnehmbar sind und durch sie eine Herdenimmunität entstehen würde, die systematisch Infektionsketten unterbrechen könnte.

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IWH-Flash-Indikator II. Quartal und III. Quartal 2020

Katja Heinisch Oliver Holtemöller Axel Lindner Birgit Schultz

in: IWH Flash Indicator, No. 2, 2020

Abstract

Die Corona-Pandemie hat dazu geführt, dass das deutsche Bruttoinlandsprodukt im ersten Quartal 2020 um 2,2% im Vergleich zum Vorquartal gesunken ist. Dieser starke Rückgang ist vor allem auf die im Laufe des Monats März in Deutschland und in anderen Ländern eingeführten Maßnahmen zur Eindämmung des Virus zurückzuführen. Bereits aus anderen Gründen war das Bruttoinlandsprodukt schon im vierten Quartal 2019 leicht zurückgegangen. Die Rezession wird sich im laufenden Quartal noch weiter vertiefen und das Bruttoinlandsprodukt um 7,2% zurückgehen, weil bis Mitte Mai die Restriktionen zur Eindämmung der Pandemie noch gravierend waren, aber auch weil private Haushalte und Unternehmen eine Vielzahl von wirtschaftlichen Aktivitäten individuell eingeschränkt haben. Im dritten Quartal 2020 dürfte die Produktion dann wieder zulegen, sofern die Eindämmungsmaßnahmen weiter gelockert werden können (vgl. Abbildung 1).

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