Recovery Loses Momentum – Economy and Politics Still Shaped by the Pandemic
Oliver Holtemöller, Stefan Kooths, Claus Michelsen, Torsten Schmidt, Timo Wollmershäuser
Wirtschaftsdienst,
No. 11,
2020
Abstract
The corona pandemic has left substantial marks on the German economy and its impact is more persistent than presumed in the spring. In their autumn reports, leading German economic research institutes have revised their economic outlook downwards by roughly one percentage point for both this and next year. They now expect gross domestic product to fall by 5.4 % in 2020 (previously 4.2 %) and to grow by 4.7 % (5.8 %) in 2021 and 2.7 % in 2022. The downgrade of the forecast follows a more pessimistic assessment of the recovery, which is being held back by those sectors that are particularly dependent on social contacts. The precrisis level of output will not be reached until the end of 2021 with GDP remaining at 2.5 % below the level that would have prevailed without the pandemic. Despite massively falling back on shorttime working schemes, an estimated 820,000 jobs were lost due to the crisis. The government will run a record high budget deficit of 183 billion euros in 2020. In 2021 and 2022, deficits will remain substantial at 118 billion euros and 92 billion euros, respectively.
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14.10.2020 • 22/2020
Economic slump in East Germany not as severe as in Germany as a whole ‒ Implications of the Joint Economic Forecast and new data for East Germany
The German economy started recovering quickly after the drastic pandemic-related slump in spring 2020. The recovery, however, loses much of its momentum in the second half of the year. The Joint Economic Forecast predicts that production levels seen before the crisis will not be reached again until the second half of 2021. In principle, the East German economy is following this pattern, although the economic slump is likely to be somewhat milder.
Oliver Holtemöller
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14.10.2020 • 21/2020
Recovery Loses Momentum ‒ Economy and Politics Still Shaped by the Pandemic
The corona pandemic leaves substantial marks in the German economy and its impact is more persistent than assumed in spring. In their autumn report, the leading German economic research institutes have revised their economic outlook downwards by roughly one percentage point for both this and next year. They now expect gross domestic product to fall by 5.4% in 2020 (previously -4.2%) and to grow by 4.7% (5.8%) in 2021 and 2.7% in 2022.
Oliver Holtemöller
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Cultural Resilience and Economic Recovery: Evidence from Hurricane Katrina
Iftekhar Hasan, Stefano Manfredonia, Felix Noth
Abstract
This paper investigates the critical role of culture for economic recovery after natural disasters. Using Hurricane Katrina as our laboratory, we find a significant adverse treatment effect for plant-level productivity. However, local religious adherence and larger shares of ancestors with disaster experiences mutually mitigate this detrimental effect from the disaster. Religious adherence further dampens anxiety after Hurricane Katrina, which potentially spur economic recovery. We also detect this effect on the aggregate county level. More religious counties recover faster in terms of population, new establishments, and GDP.
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16.09.2020 • 18/2020
Economy recovers from the shutdown – but a quick return to pre-crisis normality is unlikely
The German economy has bounced back strongly over the summer, recovering a considerable part of the production slump caused by the shutdown in spring. Nevertheless, real gross domestic product in 2020 is likely to contract by 5.7%. In 2021, growth is expected to average 3.2% according to IWH autumn economic forecast. The decline in production in 2020 is likely to be less pronounced in East Germany com¬pared to Germany as a whole.
Oliver Holtemöller
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Borrowers Under Water! Rare Disasters, Regional Banks, and Recovery Lending
Michael Koetter, Felix Noth, Oliver Rehbein
Journal of Financial Intermediation,
July
2020
Abstract
We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.
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The Corona Recession and Bank Stress in Germany
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
No. 4,
2020
Abstract
We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.
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17.06.2020 • 10/2020
High risk of corporate bankruptcy due to the corona shutdown
The Corona shutdown increases the probability of corporate bankruptcy. An analysis based on corporate financial statements from 2014 to 2018 reveals that in the United Kingdom, 73% of shutdown firms are not able to cover interest expenses from earnings before interest and taxes if they lose one twelfth of annual turnover. In Germany, the fraction amounts to 81%.
Oliver Holtemöller
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Phillips Curve and Output Expectations: New Perspectives from the Euro Zone
Giuliana Passamani, Alessandro Sardone, Roberto Tamborini
DEM Working Papers,
No. 6,
2020
published in: Empirica
Abstract
When referring to the inflation trends over the last decade, economists speak of "puzzles": a “missing disinflation” puzzle in the aftermath of the Great Recession, and a ”missing inflation” one in the years of recovery to nowadays. To this, a specific "excess deflation" puzzle may be added during the post-crisis depression in the Euro Zone. The standard Phillips Curve model, in this context, has failed as the basic tool to produce reliable forecasts of future price developments, leading many scholars to consider this instrument to be no more adequate. The purpose of this paper is to contribute to this literature through the development of a newly specified Phillips Curve model, in which the inflation-expectation component is rationally related to the business cycle. The model is tested with the Euro Zone data 1999-2019 showing that inflation turns out to be consistently determined by output gaps and and experts' survey-based forecast errors, and that the puzzles can be explained by the interplay between these two variables.
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Asymmetric Investment Responses to Firm-specific Forecast Errors
Julian Berner, Manuel Buchholz, Lena Tonzer
Abstract
This paper analyses how firm-specific forecast errors derived from survey data of German manufacturing firms over 2007–2011 affect firms’ investment propensity. Understanding how forecast errors affect firm investment behaviour is key to mitigate economic downturns during and after crisis periods in which forecast errors tend to increase. Our findings reveal a negative impact of absolute forecast errors on investment. Strikingly, asymmetries arise depending on the size and direction of the forecast error. The investment propensity declines if the realised situation is worse than expected. However, firms do not adjust investment if the realised situation is better than expected suggesting that the uncertainty component of the forecast error counteracts positive effects of unexpectedly favorable business conditions. Given that the fraction of firms making positive forecast errors is higher after the peak of the recent financial crisis, this mechanism can be one explanation behind staggered economic growth and slow recovery following crises.
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