By David Böcking, Dinah Deckstein, Martin Hesse, Armin Mahler, Martin U. Müller, Michael Sauga, Gerald Traufetter
The Liedl carpentry workshop inside the town of Pfarrkirchen, in southeastern Bavaria, will be a family business founded in 1914. Stefan Liedl will be the fourth generation of the family to head the company, however he as well as his father, Franz Liedl, have never experienced a situation quite like This particular.
Each year, Liedl presents two room arrangements at the International Handwerk Messe, a trade fair for construction, renovation as well as refurbishment products in Munich which the company attends in order to attract potential customers. however This particular year, the fair got cancelled at short notice because of the coronavirus. “We’re shocked,” says Franz Liedl. The company fortunately still carries a buffer of contracts to keep things going for few months. however what happens after which? The carpenter doesn’t know. “We’re a bit concerned,” he says.
Although the number of people with the virus in Germany will be comparatively smaller, This particular has already managed to infect the economy, even in tranquil Pfarrkirchen.
This particular’s affecting not only companies which export products to or import key parts coming from China, however also service providers, distributors as well as craftspeople. The more rigidly Germany attempts to prevent the virus’ spread, the more severe the collateral damage to the local economy will be. Hotels as well as restaurants are losing revenues as well as travel companies as well as airlines are suffering as the result of trade fair as well as business trip cancellations.
Only the Beginning
as well as This particular will be only the start. As soon as the warehouses are empty, the companies which depend on products coming from China will need to limit or even stop production. If the virus spreads even further, entire workforces might end up having to stay home, as well as consumers will consume less, because they will feel safest in their homes or apartments.
If the situation deteriorates severely, many companies will run out of cash as well as will have to file for bankruptcy. Unemployment will also rise. Meanwhile, banks could run into serious problems.
At the moment, no one wants to speculate on whether which extreme situation will unfold. This particular all depends on how long This particular takes for the virus to be brought under control. As a result, no economist can predict how deep the crash will be as well as whether the economy will quickly rebound, using a v-shaped recovery, or whether This particular will be a slower, u-shaped one or a far-slower l-shaped one.
On Tuesday, the U.S. Federal Reserve showed how dangerous This particular considers current developments to be by lowering the interest rate by half a percentage point, even though the U.S. economy will be still booming. This particular was the largest interest decrease since 2008 as well as the first one since the financial crisis to be made between regularly scheduled meetings. The move was primarily meant to calm the stock market – which seems to have worked, at least for today.
Are Measures Still Available?
however what options do governments as well as central bankers actually have for mitigating the economic side-effects of the coronavirus?
Calls for government intervention are growing louder inside the business world. Michael Frenzel, president of the Federal Association of the German Tourism Industry, argued This particular week which his sector — which employs over 3 million people as well as includes several hundreds of thousands of primarily smaller- to midsized companies — must “necessarily” be “part of a federal government stimulus package.”
German national airline Lufthansa has drastically cut its flight schedule as well as has grounded 150 planes, or 20 percent of its fleet. however if Lufthansa will be no longer regularly using its slots at highly trafficked airports, This particular could wind up losing its takeoff as well as landing rights.
“Corona will be affecting the entire airline industry,” says Lufthansa CEO Carsten Spohr. “These are exceptional circumstances to which we are having to adjust our flight plans. which’s why we need a targeted suspension of the current slot regulation, to ensure which airlines are not being forced to fly with empty aircraft merely to maintain their takeoff as well as landing rights,” says Spohr. “which makes no sense environmentally or economically.”
On Friday, the company made the even more dramatic announcement which This particular could reduce as many as 50 percent of its flights inside the coming weeks to offset the lack of demand.
In Berlin, government leaders are today discussing ways to fight the crisis. On the one hand, the government doesn’t want to be seen as sitting on its hands. however This particular also doesn’t want to do anything which will further fuel fears. “The psychology will be a much bigger problem than the virus itself,” says an official at the Economics Ministry.
Economics Minister Peter Altmaier has worked out a three-step plan to be implemented if the situation worsens. inside the first step, companies who run into financial problems are to be supported by credit guarantees or loans coming from the state-owned KfW development bank.
These funds can be increased, if necessary, in step two. Financial authorities could also delay tax payments coming from businesses in order to preempt any liquidity problems for companies. Only step three could involve taking measures to boost demand.
There will be enough money available for a classic economic stimulus package. Germany has 50 billion euros of reserves which were earmarked to help overcome the refugee crisis however haven’t been spent. Because German as well as EU debt rules allow for higher borrowing during times of crisis, they wouldn’t be an obstacle to additional spending.
The question, however, will be how which money can best be spent. After the 2008 financial crisis, municipalities as well as some other entities were provided with extra money to build streets as well as schools. however the construction industry will be operating at such a high capacity at the moment which additional money could mostly just drive up the prices.
The government could also try to stimulate consumption, for example, by temporarily lowering the value-added tax (VAT). however if people are avoiding stores as well as restaurants out of fear of the virus, which could also only have a limited effect.
The coronavirus will be affecting the supply as well as demand sides of the economy in equal measure, producing This particular difficult for politicians as well as central banks to provide an adequate response. Some companies are losing revenues, while others are unable to manufacture their wares because their staff needs to stay at home. Ifo Institute for Economic Research President Clemens Fuest believes which This particular limits politicians’ options for countering the crisis. “This particular can’t be controlled,” he says. “All you can do will be react.”
Memories of 2008
For example, by implementing the kind of “short-time work” measures adopted during the 2008 recession, which saw workers’ hours cut by their companies however the government temporarily covering the difference in their salaries. If an “unavoidable event” leads to interruptions in manufacturing as well as work, the Federal Labor Office can take over the payment of 67 percent of wages for a maximum of 12 months. The idea will be to prevent layoffs until the economy can recover.
Federal Employment Minister Hubertus Heil will be also currently working on an amendment to the law which could be implemented quickly as well as used during the epidemic which could allow the short-time work subsidy to be paid out for a total of 24 months. inside the event of short-time work, up to 100 percent of an employer’s contributions to a worker’s social benefits could be refunded, easing businesses’ concerns about sliding into bankruptcy as a result of the virus.
Uwe Burkert, the chief economist at the Landesbank Baden-Wurttemberg (LBBW), a state-owned bank, remembers the financial as well as economic crisis of 2008/2009 well. His bank had to obtain a government bailout at the time, as well as many some other companies only survived the crisis thanks to various forms of aid coming from Germany’s federal as well as state governments.
Burkert as well as his team are certain which the virus will have a severe impact on the German economy. “We’ve written off the first half of the year,” he says, explaining which the bank will be expecting the economy to shrink For 2 successive quarters.
The Wrong Medicine?
Burkert says he’s concerned which the regulations imposed by countries inside the wake of the financial crisis could actually exacerbate the current situation. As part of efforts to shore up banks, they were required to raise their risk provisions for loan defaults as well as to maintain greater capital reserves for the event which their credit ratings are downgraded.
however those rules have also narrowed banks’ profit margins, leading them to turn away coming from lending, which only worsens some other companies’ problems. Standard & Poor’s, the rating agency, will be already warning which the coronavirus epidemic could lead to a wave of downgrades for highly indebted companies.
Burkert will be calling for the implementation of the state liquidity-aid as well as guarantees which proved highly successful during the financial crisis. He believes This particular could help the contagious shock set off by the coronavirus coming from growing into a financial crisis. He says This particular’s possible which many banks wouldn’t be strong enough to withstand the wave of loan defaults.
Burkert believes a further decrease in interest rates by the European Central Bank (ECB) could make little difference. He argues which could do more harm than Great to banks, which are already suffering coming from the negative interest rates, as well as so also hurt companies.
Unlike the Federal Reserve, the ECB has little room for maneuver. however the further the crisis deepens, the greater the pressure will become on Christine Lagarde, the fresh ECB president, to act.
“The Uncertainty Remains Unchanged”
Generally speaking, the entities which benefit the most coming from improvements in monetary policy are stock exchanges. Usually, however, market prices initially go down after a large adjustment before they start to rise again for the longer term.
which could happen again This particular time, once the extent to which the coronavirus will be affecting the economy This particular becomes clear.
The article you are reading originally appeared in German in issue 11/2020 (March 7th, 2020) of DER NewsGerman.
“The uncertainty remains unchanged,” says Cologne wealth manager Bert Flossbach. however, he says, “The market tends to exaggerate in phases like This particular. as well as which can be exploited.” Flossbach manages 26 billion euros in his two large mixed-asset funds. He has hedged part of which investment, however he has also started off investing again in “robust businesses.”
Investors have punished companies with what Flossbach calls a “weak immune system” particularly hard because they are deemed especially vulnerable to shocks, including airlines as well as tourism companies.
In Great times, the tourism conglomerate TUI has profited coming from its highly lucrative cruise business, however today cruise ships are viewed as breeding grounds for the coronavirus. inside the space of a week, TUI’s stock tumbled coming from 10 euros to just over 7 euros.
TUI Executive Chairman Fritz Joussen tried to demonstrate his confidence inside the company’s future by buying about 100,000 shares of TUI stock at 7.78 euros. however investors apparently didn’t share his faith. By the end of the trading day on Thursday, TUI’s stock was at 6.33 euros.