ifo Economic Forecast

ifo Economic Forecast Autumn 2020: German Economy Still on Course for Recovery

In Germany, economic output is expected to be 5.2 percent lower on average for the year than in 2019. Given the assumed pace of recovery, GDP will not reach its pre-crisis level until the fourth quarter of 2021. The average annual growth rate in the coming year will then be 5.1 percent. The recovery will continue in 2022 and GDP will continue to grow at an above-average rate of 1.7 percent.

The coronavirus pandemic plunged the global economy into a deep recession in the first half of 2020. The measures taken to stem the flow of infections led to unprecedented slumps in sales, particularly in many service sectors. Companies in the manufacturing sector also cut back on production. Compared to earlier recessions, however, the share of the overall economic contraction attributable to industrial value added was comparatively small. With the gradual easing of shutdown measures, recovery set in everywhere by the summer at the latest. In many places, the mood of entrepreneurs improved significantly, but that of households only partially. However, a complete recovery of the global economy is likely to be a long time coming for as long as the virus continues to rampage and influence economic activity.

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Interview: ifo Economic Forecast Autumn 2020: German Economy Still on Course for Recovery

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Press conference ifo Economic Forecast Autumn 2020: German Economy Still on Course for Recovery

Recession in Germany Rather Mild in International Comparison

In the first half of the year, the German economy also found itself in by far the deepest recession in its post-war history. Following a decline of 2.0 percent in the first quarter of 2020, gross domestic product shrank by a further 9.7 percent in the second quarter. The recession in Germany was nevertheless rather mild compared with other countries. The fact that the spread of the virus could be brought under control with less restrictive measures and that industrial production, which makes up a comparatively large share of value added, was less affected by government measures may have contributed to this.

“The degree of uncertainty in our forecasts is enormous because nobody knows how the coronavirus pandemic will develop, whether there will be a hard Brexit after all, and whether the trade wars will be resolved.”

Prof. Dr. Timo Wollmershäuser, Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Forecasts

Following a significant drop in the number of new infections, Germany’s shutdown measures were also gradually eased or even completely lifted for some economic sectors. This is the main reason why the business expectations of German companies have improved significantly since their low in April, with the result that the ifo Business Climate in many economic sectors is already close to its pre-crisis level again. Nevertheless, most companies still assess the current situation as significantly worse than at the beginning of the year. It is therefore safe to say that the economic downturn has been halted and economic activity has begun to recover. In the third quarter, gross domestic product is expected to grow strongly by 6.6 percent, but this is mainly a result of low goods and services production during the shutdown.

Recovery Is Slowing Down

However, the pace of recovery is likely to slow down noticeably in the further course of the year. This is mainly because the supply of services related to social consumer spending remains restricted. The underutilization of capacity in these sectors of the economy is therefore likely to continue for the time being, assuming that an effective vaccination becomes available only in the course of next year. Moreover, permanent changes in the behavior of consumers and companies also play a role, with many of the service providers affected likely to be confronted with structural adjustments. These will probably lead to an increase in corporate insolvencies and unemployment. Demand for goods and services, on the other hand, is supported by numerous fiscal policy measures that stabilize consumers’ incomes and strengthen their purchasing power. The export-oriented manufacturing sector should also gradually benefit from the improving economic situation in the most important sales markets. The recovery in incoming orders and the ifo Export Expectations, among other things, are indications of this.

Overall, economic output is expected to be 5.2 percent lower on average this year than in 2019. Given the assumed pace of recovery, gross domestic product will not reach its pre-crisis level until the fourth quarter of 2021. The average annual growth rate in the coming year will then be 5.1 percent. In 2022, the recovery will continue and gross domestic product will continue to grow at an above-average rate of 1.7 percent.

Coronavirus Crisis Leaves Deep Scars on the Labor Market

The coronavirus crisis has also left deep scars on the labor market. Seasonally adjusted, the number of unemployed rose from 2.26 million in March to 2.94 million in June, the highest figure since the euro crisis. Since then, unemployment has declined only slowly. The ifo Employment Barometer indicates that the decline is likely to accelerate somewhat in the coming months. In August, for the first time again new hires are expected on balance, particularly in the service and construction sectors. Nevertheless, unemployment is expected to fall only slowly to 2.5 million by the end of the forecast period and thus not to return to its pre-crisis level. This is mainly because the workers who lose their jobs as a result of the rising number of corporate insolvencies will not find new employment at least in the medium term.

Key Forecast Figures for Germany

  2019 2020 2021 2022
Gross domestic product (% change over previous year) 0.6 -5.2 5.1 1.7
Employment (1,000 persons) 45,269 44,919 45,167 45,319
Unemployment (1,000 persons) 2,267 2,678 2,599 2,520
Unemployment rate (in % of civilian labor force) 5.0 5.9 5.7 5.5
Consumer prices (% change over previous year) 1.4 0.6 1.4 1.6
General government financial balance 2019 2020 2021 2022
 - EUR billion 52.5 -170.6 -86.9 -68.4
 - in % of GDP 1.5 -5.1 -2.4 -1.8
Balance on current account 2019 2020 2021 2022
 - EUR billion 244.0 215.4 276.2 290.1
 - in % of GDP 7.1 6.4 7.7 7.8

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2020 to 2022: forecast by the ifo Institute.
© ifo Institute Sept. 2020

Downward Risks Predominate

The overall economic outlook is subject to many imponderables. On the one hand, the incidence of coronavirus infection has been on the rise again in many places since the summer and some countries have again taken measures to contain the pandemic. In the present forecast, it is assumed that these measures will be regionally and temporarily limited, so that the economy will recover only slowly as outlined. A renewed shutdown in Germany or in one of its partner countries would have the potential to trigger a second recession. There is also a high degree of uncertainty about the medium-term consequences of the coronavirus crisis. It is considered certain that – like any recession – the coronavirus crisis will push up the number of corporate insolvencies as well, impairing potential output at least temporarily. However, a number of measures taken by the German government are aimed at preventing such a wave of insolvencies for the time being. It is therefore unclear whether the historical relationship between business cycle fluctuations and insolvencies will continue in its present form.

On the other hand, the coronavirus pandemic has not defused other trouble spots. While the forecast is based on the assumption that there will be no hard Brexit or escalation of the US trade war, it has in particular become much more likely that the United Kingdom will withdraw from the EU internal market at the end of this year without a new trade agreement. Even if the specific economic consequences are difficult to calculate – because there is a lack of historical experience – such a step would very probably trigger a recession in the United Kingdom and thus burden the German economy. Moreover, the economic consequences of structural change in the German automotive industry remain uncertain. If the switch in production to alternative powertrains means established domestic value chains within Germany are no longer necessary in their current form, there is a considerable risk of structural distortions, which could have macroeconomic consequences due to the great significance of the automotive industry.

Ultimately, however, overall economic demand could also recover more quickly than outlined here. The forecast assumes that private households will not spend the large savings they have accumulated during the shutdown and that, rather, the precautionary motive will also play a role in their saving decisions during the forecast period. Accordingly, the savings rate of private households, which rose to a record of 21 percent in the second quarter of 2020, is expected only gradually return to its pre-crisis level. However, should it be possible to control the incidence of infection more quickly than assumed here, for example because a vaccine becomes available earlier, uncertainty about future household income would decline significantly and a reduction in savings would lead to a stronger increase in private consumer spending.

 

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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