RWI: Corona pandemic continues to burden German economy

by David Fleschen

The RWI - Leibniz Institute for Economic Research expects German economic output to decline by 4.7 percent this year. In June, it had still predicted a decline of 5.8 percent. For 2021 the RWI now expects economic growth of 4.5 percent instead of 6.4 percent, and for 2022 an increase of 2.3 percent. The situation on the labor market remains tense, with the unemployment rate expected to be 5.9 percent this year and 5.8 percent next year. The inflation rate is likely to be 0.5 percent this year and 1.5 percent next year. Public budgets are expected to show deficits of 115.9 and 79 billion euros in 2020 and 2021 respectively. The biggest uncertainty factor for economic development is the further course of the corona pandemic.

The most important results:

The RWI expects a 4.7 percent decline in German gross domestic product (GDP) this year due to the corona pandemic. In June, it was still expecting a decline of 5.8 percent. However, the German economy did not slump as sharply in the second quarter as had been expected in June. Government consumer spending and construction investments increased. For 2021, the RWI is now forecasting 4.5 percent economic growth instead of 6.4 percent, and for 2022 an increase of 2.3 percent.

The situation on the labor market is likely to remain tense for the time being. The unemployment rate rose to 5.4 percent in the first half of the year. It is likely to rise further to 5.9 percent on average over the year, partly as a result of crisis-related insolvencies at the end of the year. The labor market should then recover in the next two years, with the unemployment rate at 5.8 and 5.5 percent respectively.

Inflation is likely to fall this year to 0.5 percent, partly as a result of low energy prices and the temporary reduction in VAT. In the next two years, it should rise to 1.5 and 1.7 percent respectively. This is due to the expiring tax cuts and a significant increase in the utilization of overall economic capacities.

The state budget deficit, which is currently quite high, mainly as a result of the corona rescue measures, is expected to decline steadily in the years 2020 to 2020. While it will still amount to EUR 115.9 billion in 2020, it is expected to fall to EUR 79 billion in 2021 and EUR 37 billion in 2022. This means that the debt ratio will rise rapidly this year to around 62.9 percent of GDP, after falling below the Maastricht debt ratio of 60 percent specified by the EU for the first time in 2019. However, due to the overall economic recovery, it is likely to fall below the 60 percent mark again in 2022 at 58.6 percent.

In the second quarter, the global economy experienced its worst slump since the Great Depression of the 1930s. In the industrialized countries, overall economic activity fell by 9.8 percent compared with the first quarter. Since a significant upturn in the economy is expected in the second half of the year, GDP is likely to fall by 4.6 percent this year. For 2021, the RWI expects GDP to increase by 5.4 percent. In 2022, overall economic activity worldwide is expected to increase by 3.5 percent.

The forecast regarding the corona pandemic is based on the assumption that the number of infections in winter will rise again somewhat and that there will be renewed restrictions on economic activity in local areas. These effects are then expected to diminish again in the spring. It is assumed that the planned measures will be sufficient to keep the number of cases low and that drastic measures and in particular a renewed shutdown can be avoided. Nevertheless, activities will remain limited in some sectors of the economy. The forecast assumes that a return to an activity level from before the beginning of the pandemic will only be possible once the infection figures have fallen sustainably.

Regarding the special risks of the forecast, RWI Economic Director Torsten Schmidt says: "The slump in production was less severe than initially assumed, but the existing restrictions continue to hinder economic normalization. The further course of the corona pandemic is the greatest uncertainty factor for economic development. If the infection figures rise much more sharply than assumed, the economic recovery would be dampened much more. If case numbers fall more rapidly, the economy could recover much faster".

Source: RWI, Photo. Fotolioa

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