Coronavirus Pushes Germany into Recession – Fuest Demands Massive, Targeted Countermeasures
Fighting the coronavirus is pushing Germany into recession. “Forecasts about how deep the recession will be are currently subject to extremely high uncertainty. It is therefore necessary to consider different scenarios. One scenario under consideration at the ifo Institute is highly positive, with economic output of minus 1.5 percent for 2020. However, this takes only minor declines in industry production into account. In a second scenario, which assumes greater cutbacks in production, economic output shrinks by 6 percent,” said ifo President Clemens Fuest in Munich on Thursday.
In its last forecast in December, the ifo Institute expected 1.1 percent growth for 2020. Fuest added: “Both the uncertainty and the downside risks are very high. No one knows exactly how the cancellations and closures will affect the economy. The impact is heavily dependent on further measures to contain the epidemic and decisions made in other countries. It is therefore all the more important that the German government, the EU, and the European Central Bank (ECB) take massive and targeted countermeasures. At the same time, strategies are urgently needed for limiting the duration and intensity of the lockdown without compromising the fight against the epidemic.”
Timo Wollmershäuser, Head of Forecasts at ifo, added: “There are no comparable events in history from which we might derive probable courses the crisis could take. Besides, very few economic indicators are currently available that would allow us to estimate the overall extent of the economic consequences of the coronavirus crisis. Most indicators currently available reflect at best the situation in February. However, the historic crash of the ifo Business Climate in March indicates that the economic downturn in the second quarter will exceed all previous downturns.”
Fuest added that it is important for policymakers to take massive and targeted measures to limit the damage caused by the freezing of the economy. For small and medium-sized businesses and self-employed people, all tax payments should be suspended for a few months. “There is an urgent need for additional support to be given to employees and the self employed who are losing their income,” he said. “Liquidity assistance and state guarantees could avert a wave of insolvencies. The rules of insolvency law should be temporarily relaxed.”
He went on: “If banks lose equity as a result of loan defaults, capital regulations could force them to call in other loans as well, exacerbating the crisis. Banking supervision should therefore temporarily expand banks’ scope for action.”
He warned that “public finances in the euro area are under imminent threat. In the case of highly indebted countries, this could lead to a collapse in confidence. Euro-area countries, and also the ECB, should send a clear signal that there will be systematic support for all countries and that there is no chance of sovereign defaults.”
