Germany’s exports and imports of goods and services collapsed in the second quarter as did household spending and investment in equipment, the Federal Statistics Office said. But state spending increased during the period.

The economy contracted at its steepest rate on record in the second quarter as consumer spending, company investment and exports all collapsed during the peak of the COVID-19 pandemic, wiping out nearly 10 years of growth.

The Federal Statistics Office said gross domestic output (GDP) in Europe’s largest economy shrank by 10.1% quarter-on-quarter from April to June after a revised 2.0% contraction in the first three months of the year.

The plunge was the steepest since the office began collecting quarterly growth data in 1970 and was worse than the 9% contraction predicted by economists in a Reuters poll. Adjusted for inflation, seasonal and calendar effects, it erased almost a decade of growth, the statistics office said.

“Now it’s official, it’s the recession of a century,” said DekaBank economist Andreas Scheuerle.

“What has so far been impossible to achieve with stock market crashes or oil price shocks was achieved by a 160 nanometre tiny creature named coronavirus.” On the year, gross domestic product declined by 11.7% from April to June, seasonally adjusted figures showed. Analysts polled by Reuters had expected a 11.3% contraction.

Commerzbank chief economist Joerg Kraemer said the recovery already started at the end of April, meaning that a strong increase in output was on the cards for the third quarter.

“However, this does not change the fact that it will take the German economy a long time to return to its pre-crisis level,” Kraemer added.

Giving a rare ray of light for the economic outlook, unemployment unexpectedly declined in July, separate data from the Labour Office showed on Thursday.

The number of people out of work fell by 18,000 to 2.923 million people in seasonally adjusted terms, leaving the joblessness rate at 6.4%.

A Reuters poll had forecast an increase of 43,000, which would have pushed the unemployment rate to 6.5%.

“The job market is still under pressure due to the coronavirus pandemic, even though the German economy is on a recovery course,” Daniel Terzenbach from the Labour Office said.

He added that the massive use of short-time work had helped to prevent higher unemployment and job losses.

Short-time work is a form of state aid designed to encourage companies to keep employees on the payroll during a downturn. It allows employers to switch employees to shorter working hours and is intended to stop shocks such as the coronavirus crisis from leading into mass unemployment.

The joblessness data boosted hopes that the labour market could get out of the crisis with no more than a black eye, which could support household spending.

The government hopes its stimulus package - worth more than 130 billion euro ($153 billion), including a temporary VAT cut to boost domestic demand - will help the economy return to growth.

Overall, the government expects the economy to shrink by 6.3% this year and rebound with an expansion of 5.2% in 2021. This means that the German economy is unlikely to reach its pre-crisis level before 2022.

German annual inflation came to a standstill in July due to the coronavirus pandemic, posting its weakest reading in more than four years, preliminary data for Europe’s largest economy showed on Thursday.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, stagnated year-on-year after rising by 0.8% in the previous month, the Federal Statistics Office said.

The reading compared with a Reuters forecast for 0.4% and was the lowest since May 2016.

On the month, EU-harmonised prices fell by 0.5% in July. A Reuters poll had predicted a drop of 0.2%.

The European Central Bank has a target of keeping inflation close to but below 2% in the eurozone.

Meanwhile, export expectations in the manufacturing sector of Europe’s largest economy rose in July, with the automotive industry among the biggest winners, the Ifo institute said, in a boon for a sector that has been hit hard by the coronavirus pandemic. The car industry, spearhead of Germany’s export-driven economy, has taken a beating from the pandemic that halted production at some sites during a lockdown that came as companies were already struggling to shift away from diesel- and petrol-powered cars toward “green” electric vehicles.

Reuters