Joint Economic Forecast Autumn 2020: Recovery Loses Momentum – Economy and Politics Still Shaped by the Pandemic

A Laborious Path Back to Normality

The pre-crisis level of economic output will probably not be reached until the end of 2021. Economic output will then be 2.5 percent below the level that could have been achieved without the pandemic. The German economy is not expected to return to normal capacity utilization until the end of 2022.

The coronavirus crisis has also had a clear impact on the labor market. Despite a massive uptake of short-time work, an estimated 820,000 jobs were lost by mid-year. Since then, the number of people in employment has risen again slightly, but the pre-crisis level will not be reached until mid-2022. The unemployment rate is expected to rise to 5.9 percent this year and next year, and to fall slightly to 5.5 percent in 2022.

The stimulus packages, in conjunction with the automatic stabilizers, have helped to stabilize disposable incomes of private households, even during the acute crisis phase. At the same time, this means that the overall public budget will end the current year with a record deficit of EUR 183 billion. In the next two years, too, the deficits will remain considerable at EUR 118 billion (2021) and EUR 92 billion (2022).

Economic Policy in Crisis Mode

Even the best economic policy measures will not be able to compensate for the overall loss of income in 2020 and 2021. However, economic policy has a major role in determining which population groups will bear the loss of income and to what extent the long-term income trend will be affected by the consequences of the pandemic. In view of the supply-side and demand-side economic shocks caused by the coronavirus pandemic and the associated infection control measures, the institutes welcome the fact that economic policy has taken discretionary measures aimed at stabilizing the economy and avoiding negative long-term consequences for the economy.

Global Recovery from 2021

The coronavirus pandemic caused large parts of the global economy to collapse drastically in the spring, with the declines in many places being sharper than during the Great Recession. Internationally, the economic slump was largely synchronized, making it global in nature. Even though the pandemic is by no means yet on the retreat, much of the world’s economic activity had already resumed by the summer. In the meantime, a good part of the slump has probably been made up for. The assumption on which the forecast is based regarding the course of the pandemic envisions that the existing restrictions will continue to apply in large parts of the world for the time being, although they will also be tightened up in certain places and at certain times. Over the course of the coming year, it will then be possible to reverse the pandemic so that containment measures can be gradually lifted. As a result, economic activity will be less and less impeded over the coming year.

All this will initially weigh on the further global recovery, which is likely to slow down significantly after its interim spurt around the middle of the year. Global production is expected to fall by an average of 4.0 percent in 2020, the sharpest fall since the Second World War. For 2021, the institutes expect a strong increase of 5.9 percent due to the ongoing recovery process. In 2022, global production is expected to expand by 3.7 percent, which means that the rates of change will gradually normalize.

Risks

Downside risks: The most significant risk to the forecast continues to be the uncertain course of the pandemic. Future insolvencies represent a further risk. Considerable risks also arise from the international environment, especially from the still unresolved trade conflicts, but also from distortions in the financial system or national debt crises.

Upside risks: Retained purchasing power of private households.