German Economic Research Institutes Cut Forecasts for German GDP in 2020 and 2021

Eufemia Didonato

By Maria Martinez The coronavirus pandemic has left substantial marks in the German economy and its effects are more persistent than assumed in spring, the German Ifo Institute said in the presentation of its joint economic forecasts with other German economic research institutes. In their autumn report, the German institutes […]

By Maria Martinez

 

The coronavirus pandemic has left substantial marks in the German economy and its effects are more persistent than assumed in spring, the German Ifo Institute said in the presentation of its joint economic forecasts with other German economic research institutes.

In their autumn report, the German institutes revised down their forecasts for the German economy by roughly one percentage point for 2020 and 2021. The downgrades follow a more pessimistic assessment of the recovery process, the report said.

The eurozone’s largest economy will shrink 5.4% this year, more than the 4.2% decline estimated in the previous joint forecasts. In 2021, the German economy is expected to grow 4.7%, less than the 5.8% previously forecast, and 2.7% in 2022.

“Although a substantial part of the drop in output experienced in spring has already been recovered, the remaining catch-up process is the more difficult part of the return to normality,” said Stefan Kooths, head of forecasting at the Kiel Institute.

The recovery is being held back by those sectors that are particularly dependent on social contact, such as restaurants and tourism, the event business and air traffic.

“Activity in this part of the German economy will remain depressed for some time to come and will catch up with the rest of the economy only once measures to control the pandemic have largely been dropped, which we do not expect before next summer,” Mr. Kooths said.

Investment will be slow to recover because many companies have seen their equity positions deteriorate as a result of the crisis. The recovery is being driven primarily by exports, which had contracted particularly sharply in the course of the crisis, the research institutes said.

The pre-crisis level of output won’t be reached until the end of 2021, with gross domestic product then being still 2.5% below the level that would have prevailed without the pandemic. Normal capacity utilization is expected to be reached only by the end of 2022.

The coronavirus crisis has also struck a hard blow to the labor market. Despite short-time working schemes, an estimated 820,000 jobs were lost by mid-year, the report said. Since then, the number of people in employment has risen slightly, but the pre-crisis level won’t be reached until mid-2022, the institutes forecast. The unemployment rate is expected to rise to 5.9% this year and next year and to fall slightly to 5.5% in 2022.

The economic stimulus packages, in conjunction with the automatic stabilizers, have helped to keep private disposable incomes relatively stable. In return, the general government will incur a record high budget deficit of EUR183 billion ($214 billion) this year. In 2021 and 2022, deficits will remain substantial at EUR118 billion and EUR92 billion, respectively.

The most important risk to the forecast stems from the still uncertain course of the pandemic. The institutes assume that starting in spring next year, disease control measures can be rolled back to such an extent that they no longer have a significant impact on economic activity by autumn.

A positive risk to the outlook is the sharp rise in private savings which, if released more quickly than assumed in the forecast, could translate itself into a quicker than anticipated recovery, the institutes said.

 

Write to Maria Martinez at [email protected]

 

(END) Dow Jones Newswires

October 14, 2020 04:15 ET (08:15 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.

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