ifo Institute Fears Lasting Economic Damage from Coronavirus in Germany

The ifo Institute fears that the coronavirus will cause lasting damage to the German economy. The problem lies in a reluctance to invest, writes Joachim Ragnitz, Managing Director of the ifo Institute’s Dresden Branch, in an essay for ifo Schnelldienst. “Real investment in equipment was already growing extremely weakly in 2019. According to economic forecasts, it will remain minimal until 2022. This may lead to an insufficient number of new jobs being created.”

Losses of sales and profits due to the pandemic deprive companies of the scope to finance necessary investments in physical capital. Banks are not offering much in the way of support in this situation, either: their willingness to grant loans depends on how much equity the borrower has available. On top of this, Ragnitz writes, there is a diminished need for investment for as long as capacity remains underutilized. Finally, uncertainty about the recovery is curbing the willingness of companies to invest. But reduced investment will not only slow down the modernization of production facilities, it will also put the brakes on productivity growth and job creation.