RWI: Corona epidemic weakens German economy

by David Fleschen

Due to the effects of the Corona epidemic, the RWI - Leibniz Institute for Economic Research is lowering its forecast for German economic growth in 2020 by almost two percentage points to now -0.8 percent. For 2021, it expects 2.3 instead of 1 due to catch-up effects. 5 percent. The unemployment rate is expected to remain stable at 5 percent in 2020 and 2021, despite the slump in production. Public budgets are expected to show a minus of 7 billion euros in the coming year, even without taking into account the extensive aid programs. Overall, the Corona epidemic shows a temporary sharp decline in production for the German economy and the global economy.

The main results:

• Due to the effects of the Corona / COVID-19 epidemic, the RWI is lowering its forecast of German economic growth for 2020 by almost two percentage points compared to December of last year from 1.1 to now -0.8 percent. For 2021, it expects 2.3 percent instead of 1.5 percent due to catch-up effects.

• The forecast is based on the assumption that production will only decrease sharply in the first half of this year due to the economic constraints resulting from the COVID 19 epidemic. As a result of the epidemic and the countermeasures taken, GDP growth is likely to be 2 percentage points less than would otherwise have been expected. It is assumed that the measures that have now been taken will actually slow the spread of COVID-19 and that there will already be a significant increase in gross domestic product (GDP) in the second half of 2020 and in the coming year due to catch-up effects.

• The job market is robust. The easing of the regulations on short-time work and the liquidity support for companies should keep employment stable in the forecast period despite COVID-19. The unemployment rate is expected to be 5 percent in 2020 and 2021, respectively.

• Inflation is expected to decrease significantly in 2020 and 2021, reaching 0.7 percent this year and 1.3 percent next year, mainly due to lower energy prices. In addition, domestic price inflation is likely to remain weak due to the weak economic dynamism. Core inflation (prices excluding energy) is expected to be 1.4 percent in both years.

• The government budget surplus should be negative again next year at the latest. In the current year, it is expected to be around 10 billion euros and will reach a deficit again in 2021 with -7 billion euros. Even without the federal government's aid program, there was an accelerated reduction in the budget surplus in 2020 and 2021. In relation to GDP, this means a decrease in the budget balance from 0.3 to around -0.2 percent over the same period. The falling structural primary balance over the forecast period indicates an expansionary fiscal policy. The debt-to-GDP ratio fell below 60 percent of GDP in 2019 and is expected to decrease further to just under 56 percent by 2021. Government revenue developed parallel to GDP with a share of approx. 46 percent.

• The global economy is likely to slow down significantly this year due to the effects of the corona epidemic. In the first half of 2020, overall economic activity is expected to decrease sharply. Overall, global production is expected to increase by 0.8 percent this year. It should increase by 3.1 percent in the coming year. The central assumption of this forecast is that COVID-19 can be contained.

RWI economic expert Torsten Schmidt says about the economic impact of the corona epidemic: “The corona epidemic will lead to a sharp decline in production in Germany in the short term. Not only for health reasons, we should try everything to successfully prevent a major outbreak, it could also save us from great economic damage. ”

Source: RWI, Photo: Fotolia

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