RWI: Economic low point has been overcome

by David Fleschen

The RWI - Leibniz Institute for Economic Research expects a 5.8 percent slump in German economic growth this year due to the measures taken to combat the corona pandemic. Next year, the economy is expected to grow by 6.4 percent. The unemployment rate is expected to be 5.9 percent this year and 5.3 percent next year. Significantly restricted demand, lower energy prices and the temporary reduction in the value-added tax are having an impact on inflation. This year it is likely to be 0.2 percent, next year 1.3 percent. Taking into account the corona measures and their enormous costs, the public budget deficits in 2020 and 2021 are expected to be 176 and 62 billion euros respectively.

The most important results:

  • The RWI expects a 5.8 percent decline in German gross domestic product this year due to the corona pandemic. For 2021, it then expects growth of 6.4 percent again.
  • The shutdown of economic activity in March and April led to a massive decline in production. It was only at the end of April that production gradually began to pick up again. Declining numbers of new infections led to the gradual withdrawal of restrictions introduced. However, a complete abolition is still not foreseeable. Nevertheless, there are many indications that the low point has been passed.
  • In view of the corona crisis, companies have severely restricted their investment demand. Investments in equipme
  • nt and software in the first quarter fell by almost 7 per cent compared with the previous quarter. Construction investments, on the other hand, were initially expanded by 4 percent. However, there are also signs of a slowdown for the second quarter. In the coming year, investments are likely to receive a strong boost from the German government's economic stimulus package.
  • The companies made massive use of the instrument of short-time work, which had been extended by the German government. In April alone, short-time work was announced for over 8 million employees. A number of measures to contain the pandemic are likely to remain in place in the coming months. At the same time, the number of insolvencies is expected to increase. Unemployment is therefore expected to continue to rise, albeit at a slower pace. This year, the unemployment rate is expected to rise to 5.9 percent, and in 2021 it is expected to fall to 5.3 percent.
  • Inflation is mainly influenced by lower energy prices and the temporary reduction in VAT in the second half of 2020. In addition, there are price-dampening effects due to a significant reduction in demand. These will clearly outweigh the price-driving effects of supply-side restrictions. The inflation rate is likely to be 0.2 percent this year. Inflation will not pick up again until next year, with a figure of 1.3 percent expected for 2021.
  • - As a result of the Corona crisis, the situation of public budgets has deteriorated considerably. This results in budget deficits of about 176 billion euros in 2020 and 62 billion euros in 2021. In relation to GDP, net lending/borrowing was -5.1 per cent and -2.0 per cent respectively. On the revenue side, there is a significant drop in tax revenues, while at the same time higher expenditure is incurred for increased social benefits. Added to this are the expansion of short-time working compensation, tax measures and the economic stimulus package with a total of around 130 billion euros.
  • Regarding the current situation of the German economy, RWI Economic Director Torsten Schmidt says: "The low point of the crisis has probably been overcome. We expect an economic recovery as early as the summer, thanks to the gradual easing and the massive fiscal stimulus. However, the strength of the recovery will depend largely on the further development of the pandemic in Germany and the rest of the world.

Source: RWI, Photo: Fotolia

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