Recovery of German economy loses momentum

by David Fleschen

The corona crisis is leaving clear traces in the German economy and hitting it harder than expected in spring. In their autumn reports, the leading economic research institutes have revised their forecasts for this year and next year downwards by a good one percentage point in each case. They now expect gross domestic product to fall by 5.4 percent in 2020 (previously -4.2%) and grow by 4.7 percent (5.8%) in 2021. In 2022, economic output should then increase by 2.7 percent.


The reason for the comparatively more pessimistic assessment is that the institutes now assess the further recovery process as somewhat weaker than in the spring. "Although a good part of the slump from the spring has already been made up, the remaining catch-up process represents the more laborious route back to normality," said Stefan Kooths, head of economic research at IfW Kiel.

The recovery is being held back by those sectors that are particularly dependent on social contacts, such as restaurants and tourism, the event industry and air traffic. "This part of the German economy will continue to suffer from the corona pandemic for some time to come and will not participate in the recovery process until infection control measures are largely eliminated, which we do not expect to happen until the next summer half-year," said Kooths.

On the other hand, companies' reluctance to invest is slowing down the upswing because their equity positions have deteriorated in many cases as a result of the crisis. The recovery is being driven primarily by exports, which had slumped particularly drastically in the course of the crisis.

The pre-crisis level of economic output will probably not be reached until the end of 2021. Economic output will then be 2.5 percent below the level that could have been achieved without the pandemic. The German economy is not expected to return to normal capacity utilization until the end of 2022. Kooths: "The consequences of the crisis are by no means over once the slump has been made up for. In the medium term, production capacities are also likely to be a good one percent lower than pre-crisis estimates. However, the corona effect on production potential is still very uncertain, because it is currently virtually impossible to predict what long-term damage the crisis will cause and what effect the economic policy responses will have.

The corona crisis has also left clear traces on the labor market. Despite massive short-time working, an estimated 820,000 jobs were lost by mid-year. Since then, the number of people in employment has risen again slightly, but the pre-crisis level will not be reached until mid 2022. The unemployment rate is expected to rise to 5.9 percent this year and next year, and to fall slightly to 5.5 percent in 2022.

The economic stimulus packages, in conjunction with the automatic stabilizers, have helped to ensure that the disposable incomes of private households have remained relatively stable overall, even during the acute crisis phase. This also means that the overall public budget will end the current year with a record deficit of EUR 183 billion. In the next two years, the deficits will remain considerable at 118 billion euros (2021) and 92 billion euros (2022).

The greatest risk to the forecast remains the uncertain course of the pandemic. The institutes assume that in the course of the coming summer half-year, infection control measures can be curbed to such an extent that they no longer have a significant impact on economic activity. It is also uncertain to what extent there will still be corporate insolvencies in Germany and abroad. Furthermore, various trade conflicts continue to smoulder. If the private savings, which have meanwhile risen sharply, were to translate increasingly into additional purchases, the consumer-related sectors of the economy could be stimulated more strongly than assumed in this forecast.

Source: RWI Essen, Photo: Fotolia

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