ifo Economic Forecast

ifo Economic Forecast Winter 2021: Supply Bottlenecks and Coronavirus Wave Slow Down German Economy

Gross domestic product will increase by 2.5 percent this year and by 3.7 percent and 2.9 percent in the next two years. Compared with the ifo Economic Forecast Autumn 2021, the growth rate for 2021 has been retained. However, the growth rate for 2022 was lowered by 1.4 percentage points and raised by 1.4 percentage points for 2023. The shift in economic momentum from next year to the year after is largely due to the fourth wave of the coronavirus and to production difficulties in the manufacturing sector. 


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Supply Bottlenecks and Coronavirus Wave Slow Down German Economy 

In the coming months, the ongoing supply bottlenecks and the fourth wave of the coronavirus are likely to noticeably slow down the German economy. For the current quarter, most indicators point to a weakening of economic momentum in contact-intensive service industries. People’s mobility and visits to restaurants have both declined noticeably in recent weeks. In addition, retailers and consumer-related service providers corrected their assessment of the current and future business situation downward. This weakening of economic activity in sectors of social consumption is primarily due to people voluntarily restricting themselves to avoid the risk of infection by reducing contact. The indicators available so far suggest that the slowdown is likely to be much less severe than during the second and third waves of the coronavirus last winter, when the decision was made to shut down many businesses. 

A strong recovery and a return of private consumer spending to normal levels is not likely to occur until the summer half-year of 2022. It is true that private households accumulated considerable surplus savings during the waves of the coronavirus, either as a result of the limited scope for consumption or because cautious consumers restrained their spending. However, this forecast assumes that consumers will not spend these savings. It is also assumed that the supply bottlenecks and the associated production constraints will ease only gradually in the spring of next year. All in all, GDP will grow by 2.5 percent this year and by 3.7 percent and 2.9 percent in the next two years.

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ifo Economic Forecast Winter 2021: Supply Bottlenecks and Coronavirus Wave Slow Down German Economy

“In the summer half-year of 2022, a strong recovery will set in as the coronavirus wave subsides and the supply bottlenecks gradually end. Overall economic production is likely to increase significantly in the second and third quarters of 2022 and slowly move toward average growth rates.”

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

Labor Market Recovery Temporarily Subdued

The recovery in the labor market is also likely to be temporarily subdued in the winter half-year of 2021/22 by supply bottlenecks in manufacturing and the impact of the fourth wave of the coronavirus. However, current indicators suggest that both the build-up in employment and the decline in short-time work and unemployment are likely only to stagnate in the coming months. The recovery will then continue from spring 2022 onward. Against this backdrop, the number of people in employment is expected to increase by around 409,000 in 2022 and by 311,000 in 2023, having been 97,000 higher on average in the current year than in the previous year. The number of registered unemployed persons is expected to decrease by about 79,000 this year, before falling by about 257,000 next year and by about 124,000 in 2023. As a result, the unemployment rate is expected to fall from 5.7 percent this year to 5.2 percent on average in 2022 and 4.9 percent in 2023. Short-time work is expected to fall from an estimated average of just under 1.7 million employees this year to about 313,000 next year and 74,000 the year after. 

Private Consumer Spending Will Decline Again for the Time Being

Private consumer spending is expected to decline by 1.1 percent in the fourth quarter. In line with the assumption that the fourth wave of the coronavirus is likely to weigh on contact-intensive activities until March 2022, a further quarter-over-quarter decline in spending of 1.4 percent is expected for the first quarter of 2022. The summer half-year of 2022 is then assumed to see a strong recovery in private consumption. This is based on the assumption that the surplus savings private households have accumulated since the start of the pandemic will not be reduced. Accordingly, consumer behavior will return to normal in the course of the recovery and spending levels will once again be aligned with disposable income. However, this is not expected to make up for lost consumption in previous quarters.

Business Investment Will Continue to Slow Down for the Time Being

Business investment was on its way to pre-crisis levels, but lost momentum in the summer half-year of 2021 and remains volatile. While it was still up 1.7 percent in the second quarter compared with the first quarter, it suffered a setback of −2.1 percent in the third quarter. Due to ongoing material shortages and supply chain disruptions, the recovery in business investment is likely to be a long time coming in the final quarter of the current year. Overall, business investment will probably increase by 3.9 percent in 2022, with private investment particularly in machinery and equipment likely to rise significantly by 5.3 percent. Commercial construction investment will also pick up by 1.6 percent. Due to high order backlogs, this momentum will not yet weaken in 2023, not least because in the course of the overall economic recovery it is to be expected that postponed investment projects from previous years will be made up for. Business investment is therefore likely to rise again by 4.6 percent in 2023.

Inflation to Remain High in the Coming Year

The inflation rate is likely to remain high at the beginning of next year. Admittedly, the base effect resulting from the temporary reduction in VAT in the second half of 2020 will cease to apply in January 2022. However, the latest development in price indicators suggests that consumer prices are likely to continue to rise noticeably over the coming year. The cost increases associated with supply bottlenecks and delayed adjustments to higher energy and commodity prices will play a driving role here. As a result, the inflation rate should initially rise again from 3.1 percent this year to 3.3 percent next year. Only in 2023 should consumer price increases return to normal and fall back to 1.8 percent.

Government Budget Deficit Is Decreasing

Fiscal policy was once again significantly expansionary in the current year due to the measures taken to combat the coronavirus pandemic. Most of the pandemic-related measures are expected to expire in the course of 2022 and should then no longer have any fiscal relevance in 2023. Thus, a significantly restrictive stance is expected over the forecast period. In the current year, the deficit in government financing is expected to be EUR 162 billion. In the remainder of the forecast period, the government budget will recover, but will close both next year and the year after with deficits of a good EUR 80 billion and EUR 20 billion, respectively. The Maastricht debt-to-GDP ratio will presumably rise to 70 percent of GDP in 2021 as a result of expansionary fiscal policy. In the coming years, it will fall well below the 70 percent mark again as a result of the declining deficits and the rising GDP, but at 64 percent in 2023 it will still be just under 5 percentage points above its pre-crisis level. 

Key Forecast Figures for Germany

  2020 2021 2022 2023
Gross domestic product (percentage change over previous year)   -4.6 2.5 3.7 2.9
Employment (1,000 persons) 44898 44884 45293 45604
Unemployment (1,000 persons) 2695 2616 2359 2235
Unemployment rate (in % of civilian labor force) 5.9 5.7 5.2 4.9
Consumer prices (percentage change over previous year) 0.5 3.1 3.3 1.8
General government financial balance 2020 2021 2022 2023
 - EUR billion -145.2 -161.8 -82.4 -21.2
 - in % of GDP -4.3 -4.6 -2.2 -0.5
Balance on current account 2020 2021 2022 2023
- EUR billion 234.4 228.3 206.4 238.4
 - in % of GDP 7.0 6.4 5.5 6.0

Source: Federal Statistical Office; Federal Employment Agency; Deutsche Bundesbank; 2021 to 2023: forecast by the ifo Institute.
© ifo Institute Dec. 2021

ifo Infographic, real gross dometstic product in germany

Global Economy: Largely Determined by the Pandemic

The coronavirus pandemic and supply bottlenecks will continue to determine the development of the global economy in the forecast period. The pandemic situation is quite heterogeneous worldwide. While the US and parts of Southeast Asia were affected in the summer, the infection rates increased in Europe in the winter. In most countries, health policy measures are likely to be implemented again, restricting economic and social activities. In countries with high vaccination rates, such as Portugal, Malta, and Spain, the restrictions are likely to be less severe, provided that the decline in vaccination protection is compensated for by follow-up vaccinations. The resulting economic slump in Europe is likely to be followed by a strong recovery, as experience with previous waves of the pandemic shows. Expensive support measures will, however, lead to an increase in public debt, which will reduce much more slowly than the output gap.

Supply bottlenecks and shortages have not yet dissipated in recent months, contrary to earlier assumptions. On the contrary, the proportion of companies that perceive material shortages as hampering production has risen. However, adjustments in production processes, an easing of the pandemic situation, and price allocation mechanisms should ease the excess demand over the forecast period. This is also indicated by the fact that the majority of companies in most countries are optimistic. As a result, the very high order backlogs in some cases should lead to a significant acceleration in investment momentum. In addition, the robust growth of the global economy in the forecast period will be the result of accommodative monetary and fiscal policies.

The current inflation dynamic will subside as the demand overhang is reduced such that is no longer has a significant impact on monetary policy. This is more likely to be shaped by developments in the real economy. Due to the advanced recovery in the US, the Federal Reserve will reduce its purchases of securities. However, interest rates are not likely to be raised until the second half of 2022, as the Fed is aiming for a further improvement in the labor market situation. Although the crisis-induced rise in unemployment has virtually subsided again, the labor force participation rate in the US is still well below its pre-crisis level. The European Central Bank is likely to end the bond-buying program it launched specifically to combat the crisis in March 2022, as planned. Bond purchases under other, long-standing programs will continue thereafter, and no interest rate hike is expected in the forecast period. This also applies to the Japanese central bank, which is also flexible with regard to the scope of bond purchases.

Fiscal policy will remain accommodative. If the coronavirus pandemic curtails economic activity, as is currently the case with closures in some European countries, government support measures will continue to be provided or maintained. Experience of the pandemic to date has shown that the resulting support to private incomes helps promote a strong recovery. In line with the assumption that pandemic-related constraints will diminish as vaccination progresses, the use of support programs will also decline. However, there will be new expansionary fiscal stimulus, particularly in the US. The Infrastructure and Investment Act provides USD 550 billion in new spending over the next ten years. Under the Build Back Better Act, which includes elements of the American Jobs Plan and the American Families Plan, further fiscal stimulus will be provided. 

All in all, global GDP is expected to expand by 4.3 percent and 3.2 percent in 2022 and 2023, respectively, and by 3.9 percent and 3.0 percent in the euro area. Consumer prices are expected to rise by 3.4 percent and 2.2 percent globally and by 3.2 percent and 1.6 percent in the euro area in these years.

ifo Infographic, real gross domestic product in the world

Risks

Pandemic
Inflation trend
Corporate insolvencies
Supply bottlenecks for intermediate products and raw materials
Direction of fiscal policy 

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
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