ifo Economic Forecast Summer 2021: German Economy Caught between Openings and Bottlenecks

Germany: German Economy Caught between Openings and Supply Bottlenecks

In the first three months of this year, overall economic activity fell by 1.8 percent. This means that the strong recovery of the German economy from the first wave of the coronavirus has experienced a temporary setback. A major contributory factor was a decline in value added in construction, where production was brought forward to December by the impending VAT increase and hampered by unfavorable weather at the beginning of the year. However, trade also suffered losses as sales were hit hard by the closures of parts of the stationary retail sector that came into effect in December. In other contact-intensive services, the cyclical impact of the renewed coronavirus wave had already been felt in the final quarter of the previous year; their sales remained largely unchanged at a low level at the start of the year. Value added in manufacturing increased much more slowly than originally expected in the first quarter. Although the order situation improved again significantly in almost all industries in the first three months of the year, supply bottlenecks for key industrial intermediate products worsened to such an extent that they are likely to have stood in the way of a stronger expansion of production.

Since the end of April, coronavirus infection rates in Germany have fallen significantly and progress in vaccination against Covid-19 has gained pace. In line with this, infection control measures have been relaxed in many areas in recent weeks, and human mobility associated with consumption has increased significantly. For the remainder of the forecast, it is assumed that the existing economic restrictions resulting from infection control measures will be lifted by the end of the third quarter. Thus, at least for these reasons, there should be nothing to stand in the way of a full economic recovery in trade and contact-intensive services by the end of the year. Accordingly, the normalization of spending behavior alone will make private consumption the mainstay of the upswing. All in all, gross domestic product will expand at strong rates from the second quarter onward, already reaching pre-crisis levels in the third quarter of the current year. Overall, price-adjusted GDP is expected to increase by 3.3 percent in 2021. In the coming year, GDP is expected to be 4.3 percent higher than this year.

Labor Market Recovery Has Begun

The signs on the labor market are also pointing to recovery. As a result of the progressive openings in many sectors of the economy, unemployment and short-time work are expected to be reduced rapidly in the forecast period. While short-time work will fall back to its pre-crisis level in the coming year, unemployment will remain above this level at an annual average of 2.4 million people. The main reason for this is the job losses resulting from the rising number of company insolvencies; these workers will not find new employment at least in the medium term. The unemployment rate is expected to average 5.8 percent in 2021 and 5.2 percent in 2022.

Vaccination Progress and Openings Drive Strong Expansion in Private Consumer Spending

Private consumer spending fell again by 5.4 percent in the first quarter of the current year, having already declined by 2.3 percent quarter over quarter at the end of 2020. The main reasons for the decline were numerous restrictions on contact-intensive consumption options as well as behavioral adjustments by consumers in connection with the renewed coronavirus wave. The second and third quarters of the current year are likely to be dominated by the initial and then full opening steps on the part of political actors. The considerable progress made in the vaccination campaign, the nationwide offer of testing, and steadily declining infection rates led to a gradual easing of the restrictions previously in place as early as the second quarter of 2021. In addition, the income and employment outlook has brightened noticeably of late, as short-time work has been scaled back and unemployment has fallen at the same time. In the second quarter of 2021, private consumer spending is likely to expand by 3.5 percent and in the third quarter by an even more dynamic 6.7 percent. The reason for this will then be the complete withdrawal of restrictions, so that all consumption options will be available again in late summer.

Subdued Rise in Corporate Investment

Business investment is likely to increase by 6.1 percent year over year in 2021 after slumping by 7.4 percent in 2020. Private investment in machinery and equipment is expected to recover strongly by 8.6 percent, while commercial construction investment is also likely to increase by just under 6 percent. In the coming year, momentum will slow somewhat and business investment is expected to expand by 4.6 percent.

Inflation Rate Accelerates

Since January 2021, the rate of inflation has accelerated significantly. While in the second half of 2020 the average level of consumer prices fell below its prior-year level, in May price inflation reached 2.5 percent, the highest level since 2008. This was due first to the renewed increase in value-added tax, which in itself pushed up the inflation rate by a good one percentage point in January. Second, energy prices increased significantly compared with the previous year. The main contributory factor was the sharp rise in global market prices for crude oil, which have risen almost uninterruptedly since April 2020 from just under USD 20 to most recently just under USD 70. However, the introduction of a CO2 emissions levy on fossil fuels also pushed up the inflation rate by around 0.3 percentage points in January. On average for 2021, the increase in consumer prices is likely to be 2.6 percent and the core inflation rate 2.1 percent. However, this price surge should be only temporary. In the course of the coming year, consumer price increases should moderate again and average 1.9 percent for the year.

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 again close the current year with a significant deficit of a good EUR 150 billion or the equivalent of 4.3 percent of gross domestic product. In the further forecast period, the deficit will then be gradually reduced to around EUR 50 billion, or 1.3 percent of gross domestic product.

Key Forecast Figures for Germany

Source: Federal Statistical Office; Federal Employment Agency;
Deutsche Bundesbank; 2021 to 2022: forecast by the ifo Institute.
© ifo Institute June 2021

Global Economy: Significant Upswing

The development of the global economy continues to be largely determined by the coronavirus pandemic. In the winter half-year 2020/21, global GDP continued to recover from its drastic slump in spring 2020 and was most recently almost back at its pre-crisis level. However, there are significant differences between countries resulting from the different timing of (renewed) virus outbreaks, the different degrees of severity of infection protection measures, and the different speeds of vaccination progress. Overall, global GDP is expected to grow by 6.6 percent this year and 4.2 percent in 2022. While China has already significantly exceeded its pre-crisis level since the third quarter of 2020, global and US aggregate output is expected to exceed pre-crisis levels in the second quarter of 2021. Most other countries will follow one quarter later, but the euro area as a whole will not do so until early 2022.

At 2.1 percent, the inflation rate in advanced economies is likely to be significantly higher in the current year than in previous years. Much of the increase is attributable to the extremely low price of crude oil in spring 2020 and its rise since then. In the coming year, the inflation rate in advanced economies is expected to be 1.7 percent. By contrast, inflation in emerging economies is expected to be lower this year (3.1 percent overall) than last year (3.5 percent) and next year (3.6 percent). In China in particular, price increases are significantly lower as companies have been prevented from passing on their higher prices to consumers.

Global trade in goods is expected to pick up strongly again in the second quarter of 2021, driven by continued high demand for trade-intensive durable goods. However, demand is likely to decline in the second half of 2021 as mobility restrictions are gradually lifted. This is likely to cause a renewed increase in demand for both national and cross-border services, such that international trade in services is likely to grow strongly while trade in goods will be more subdued. At the same time, capacity bottlenecks at many ports are expected to ease as a result of the lifting of infection control measures and increased container production. All in all, global trade in goods is likely to expand by 11.0 percent this year and by 2.3 percent in 2022.

Risks

• Course of the pandemic
• Rate of inflation
• Company insolvencies
• Supply bottlenecks for intermediate products and raw materials
• Deterioration in the budgetary position