ifo Economic Forecast

ifo Economic Forecast 2020 Update: Economic Contraction of 6.6 Percent in Germany Most Likely (28.5.2020)

The German economy will probably shrink by 6.6 percent this year and then grow from this low level by 10.2 percent next year, according to the updated ifo Economic Forecast for 2020/2021. “This is based on our evaluation of the ifo survey conducted among companies in May. On average, participants consider it most likely that their own business situation will return to normal in nine months,” says Timo Wollmershaeuser, Head of Forecasts at ifo.

“This means that, after a sharp slump of 12.4 percent in the second quarter of 2020, the economy ought to recover by the middle of next year. Only then will production of goods and services attain the level it would have reached without the coronavirus crisis,” Wollmershaeuser adds. However, the forecast depends heavily on how quickly companies’ business situation returns to normal. In the best case, companies indicate that this might take an average of only five months. Economic output would then shrink by only 3.9 percent this year, with growth next year reaching 7.4 percent. In the worst case, with an average normalization period of 16 months, economic output would shrink by 9.3 percent this year and grow by 9.5 percent next year. The recovery would then be drawn out well into 2022.

In most sectors of the economy, companies responding to the ifo survey stated that their business situation would most likely return to normal in eight or nine months. The ramp-up is likely to be the slowest in aviation, where it is expected to take 16 months. However, travel agencies and tour operators, companies in accommodation and in restaurants and catering, and the automotive industry are also expecting the recovery to be slower than the average. Companies not only said how long they thought it would most likely take them to return to normal, they also provided a range of recovery durations. Accordingly, the quickest possible return to normal would be after five months on average, but the worst-case recovery would take significantly longer – 16 months on average.

All three scenarios assume a gradual easing of the lockdown starting at the end of April. During the lockdown, average economic output is likely to have contracted by around 17 percent. The estimates were based on the detailed results of economic output for the first quarter and the production, sales, and foreign trade statistics for the month of March. In forecasting economic developments for the summer half-year, the ifo Institute took into account the sharp drop in order intake seen in the manufacturing sector in March and the results of the ifo Business Survey in May. According to the survey, the business expectations of companies in all sectors of the economy have brightened considerably. However, their assessment of the current business situation remained poor; in the manufacturing sector, the corresponding indicator even fell sharply once again.

The new forecast was prepared based on the assumption not that the coronavirus is defeated in the coming months, but that its spread can be contained and a second wave of infection avoided. It also precluded a wave of insolvencies either in Germany or in its sales and procurement markets, which might lead to distortions in the financial system and require a realignment of global value chains.

Contact
Prof. Dr. Timo Wollmershäuser

Prof. Dr. Timo Wollmershäuser

Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts
Tel
+49(0)89/9224-1406
Fax
+49(0)89/907795-1406
Mail
Dr. Klaus Wohlrabe

Dr. Klaus Wohlrabe

Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Surveys
Tel
+49(0)89/9224-1229
Fax
+49(0)89/9224-1463
Mail
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