ifo Economic Forecast Winter 2020: The Coronavirus Strikes Back – Another Lockdown Slows the Economy for a Second Time

Germany: Economic Recovery Halted for the Time Being

In autumn, the spread of infection picked up pace again noticeably, so that a lockdown was again imposed in November. Germany’s economic recovery is thus likely to have come to a halt for the time being and gross domestic product is likely to shrink again in the final quarter. However, this decline is very unevenly distributed across economic sectors. While value added in the hotel and restaurant industry and in other services is likely to collapse at double-digit rates, the manufacturing sector is continuing its recovery. So far, global industrial activity continues to expand, which is reflected in rising order intake figures. Accordingly, investment and exports should continue to grow in the fourth quarter while consumer spending by private households shrinks. The fact that their decline will not be even more severe is due to the increase in VAT in January 2021, which is expected to result in a noticeable number of purchases being brought forward to the end of the year. Exports of goods will also benefit from a precautionary inventory buildup on the part of UK importers in connection with the uncertainty surrounding future trade relations between the EU and the UK. Overall, this will result in a 5.1 percent drop in economic output in 2020. Adjusted for the large number of working days compared with the previous year, the decline will be even more severe at 5.4 percent.

For the remainder of the forecast period, it was assumed that the infection control measures in place since November will remain in force unchanged until March 2021 and will then be gradually relaxed. Against this background, price-adjusted gross domestic product is expected to grow by 4.2 percent in 2021. In 2022, the recovery will continue, although the pace will slow down considerably compared to the previous year. Economic output should then increase by 2.5 percent on average over the year. This forecast takes into account the fact that an increase in corporate insolvencies means annual production capacity, which is determined in the context of the estimate of potential output, will be around 1.4 percent or just under EUR 50 billion lower in the coming year than in the last estimate before the outbreak of the coronavirus crisis in December 2019.
Recent shutdowns in Germany and other countries are pushing the recovery back. Production of goods and services won’t reach pre-crisis levels until the end of 2021.

Coronavirus Crisis Leaves Clear Marks on the Labor Market

The coronavirus crisis also abruptly interrupted the long-standing upturn in the labor market and, despite the massive use of short-time work, left clear marks. In the current year, the number of unemployed is likely to rise by an average of around 434,000 to 2.7 million. Given the high level of unemployment at the end of 2020, the average unemployment rate for the following year is likely to remain more or less at the same level as in the current year, despite the sharp decline in unemployment forecast from the second quarter onwards. In 2022, an average of 2.5 million people are still likely to be registered as unemployed. The unemployment rate will rise from 5.0 percent last year to an expected 5.9 percent this year and next year, before falling back to 5.5 percent in 2022.

Second Wave of Infection Curbs Private Consumption

Private consumer spending is expected to fall again in the 2020/2021 winter half-year, as the second wave of infection necessitated new infection prevention measures. However, this second lockdown differs significantly from the one in the spring, since so far only the hotel and restaurant industry and service providers in the fields of art, entertainment, and recreation have been affected by the restrictions. So far, turnover in the retail sector has not yet shown any signs of decline. Private consumer spending is thus expected to fall by 0.8 percent overall in the fourth quarter of 2020, a development already signaled by several leading indicators. Consumer confidence, for example, fell for the second time in succession in November, and the willingness to make larger-scale purchases has cooled noticeably. Given the limited scope for consumption, the households surveyed also stated that they would once again like to further increase their savings. At the beginning of 2021, consumer spending by private households will stagnate at best, as it is assumed that infection prevention measures will be eased only in the second quarter of the coming year. With the gradual lifting of infection prevention measures, private consumer spending will expand by a strong 3.1 percent in the second quarter of 2021 and will also expand at above-average rates thereafter.

Corporate Investment Continues to Recover at a Slower Pace

Corporate investment in 2020 is likely to fall by 7 percent year over year, which is only half as far as during the global financial crisis of 2009; private investment in equipment in particular is likely to come through this crisis much more unscathed, with a decline of a good 14 percent. For 2021, there will be a strong recovery of 6.8 percent and for 2020 a moderate expansion of 3 percent.

Fiscal Policy Framework

The current fiscal policy environment is characterized by extensive government measures to contain the health and economic consequences of the coronavirus pandemic. As a result, the public budget will close the current year with a significant deficit of a good EUR 160 billion or the equivalent of 4.8 percent of gross domestic product. In the further forecast period, the deficit will then be gradually reduced to EUR 133 billion or 3.8 percent of gross domestic product in 2021 and EUR 84 billion or 2.3 percent in 2022.