The pandemic has posed unprecedented challenges to society and the economy. What is the best way to stop the virus without permanently damaging the economy?



In a nutshell

In January 2020, the novel lung disease COVID-19 became an epidemic in China. Within the space of two months, the World Health Organization had declared it a pandemic, and the global economy was in its grip. As in many other countries, Germany’s public life and parts of its economy shut down for several weeks due to state-imposed contact restrictions. As the lockdown ended and the summer came, the spread of the virus appeared to have all but stopped. But in the fall the pandemic’s second wave inundated Germany; a third wave followed in spring 2021. Of all the areas of the economy affected by the virus, the service sector was hit hardest.

The longer the contact restrictions persisted, the greater their toll on society. In addition to massive government spending on short-time work and emergency aid to companies on the verge of bankruptcy, the restrictions limited participation in education, especially for disadvantaged children and young people, and have dampened the mood of a society cut off from social encounters, family celebrations and cultural life. Since vaccinations began in early 2021, there’s been some light at the end of the tunnel. Nevertheless, Germany will have to live with the virus for many months to come. That is why it needs a strategy that restores normal life and economic activity without letting infection numbers get out of hand. This will require an intelligent combination of vaccinations, testing, and individual responsibility.

Our experts

All experts, press releases, publications and events on the Corona crisis

Since the start of the pandemic, IWH economists have carefully studied its economic effects in the short and medium term. They have analysed the pandemic’s development, the measures introduced to slow viral transmission, and the consequences for the economy in Germany, Europe, and the world. Their reports appear in IWH’s quarterly economic forecasts, in the half-yearly joint economic forecasts set up together with the other German economic research institutes, and in the IWH Flash Indicator forecasting the upcoming quarter.

Recently, using a model that describes the relationship between economic mobility and infection rates, IWH researchers estimated that the relaxation of containment measures in March 2021 increased economic mobility in Germany by 10% and the number of infections and deaths by 25% each.

In General, IWH believes that the best economic policy is the successful containment of the pandemic. For instance, its researchers support the government taking on debt to finance state aid during the crisis. But they argue that money should be used to help areas of society and the economy that are actually hurting instead of using it to stimulate general consumption, as with the decision to lower sales tax last year.

Is a wave of bankruptcies imminent?

The bankruptcy rate is a good way to measure the economic impact of the corona crisis. A company’s involuntary exit from the market brings job losses and leaves supplier high and dry, which can induce chain reactions in other companies. A recent IWH Policy Note explains the significance of bankruptcies as an economic indicator and how to measure them with only a short time lag.

In May 2020, shortly after the first corona lockdown, the IWH’s bankruptcy research unit launched the IWH Bankruptcy Update, a well-regarded monthly source of pandemic-related economic information. Two months ahead of official government statistics, it provides and interprets data on bankruptcies in Germany. In the summer 2020, the IWH noted an increase in bankruptcies among large companies. Since then, bankruptcies have remained almost entirely below pre-crisis levels. IWH has not detected a looming wave of bankruptcies in the data, though the true number of insolvent companies may be concealed by state aid and the suspension of the obligation to declare bankruptcy.

Another Policy Note compared bankruptcies in 2020 with the long-term decline in insolvencies that began before the crisis. Based on the relationship of past bankruptcies to short-term economic developments, IWH researchers provided a prognosis of insolvencies in response to the corona shock. They then found that the actual number of bankruptcies was far lower – an indication of the effect of state aid and the suspension of the obligation to file for bankruptcy. The study also showed that most of the bankruptcies were concentrated in industries especially affected by the pandemic.

The crisis has jeopardised financial stability

Unlike the global financial crisis in 2008–2009, which originated in the financial sector and then spilled over into the rest of the economy, the corona crisis directly hits the real economy. Yet if many companies become insolvent due to the crisis, banks can be put at risk. In its June and July 2020 Policy Notes, the IWH pointed to this danger and projected its potential magnitude in various scenarios. It found that even if the economy recovers swiftly – an optimistic assumption – dozens of German banks could face insolvency as a result of loan defaults. Institutions that are particularly vulnerable are cooperative and savings banks that finance hard-hit sectors such as retail and hospitality. In some German regions, many banks were both undercapitalised and held credit portfolios full of borrowers greatly affected by the corona crisis.

When banks are in trouble, the supply of credit for companies starts to run dry, which can trigger a second-order recession. So far, generous government aid for companies has prevented massive credit defaults. But this has produced a growing number of zombie companies that have come to depend on money from the state. At some point, a wave of insolvencies will come. Germany’s banking supervision must work to strengthen the capital base of at-risk banks. Otherwise, the state will once again have to use taxpayers’ money to bail out banks without systematically restructuring their credit portfolios.

We need a new corona strategy

After the first wave of the virus in the spring 2020, IWH President Reint Gropp called for comprehensive testing for the working-age population and protective isolation for risk groups to give people some normalcy again. At that time, a vaccine was not yet in sight. Now, the vaccination campaign is underway, and, together with rapid tests, constitutes a pillar of the pandemic response. State control must eventually give way again to individual responsibility. The lockdown is a blunt instrument and it no longer reflects the needs of the moment. When extended indefinitely, it damages the economy, undermines educational opportunities, increases social inequality, endangers mental health, and erodes trust in democracy.

Publications on the Corona crisis


IWH-Flash-Indikator II. Quartal und III. Quartal 2021

Katja Heinisch Oliver Holtemöller Axel Lindner Birgit Schultz

in: IWH Flash Indicator, No. 2, 2021


Die hohen Infektionszahlen und der seit November 2020 immer wieder verlängerte Lockdown führten im ersten Quartal 2021 zu einem Rückgang des Bruttoinlandsprodukts um 1,7%. Insbesondere der private Konsum litt unter den strengen staatlichen Restriktionen. Hingegen liefen die Warenexporte gut und verhinderten einen stärkeren Einbruch der deutschen Wirtschaft. Nachdem bereits Ende des ersten Quartals in einigen Regionen Deutschlands begonnen wurde, die Restriktionen etwas zurückzunehmen, kam es aus Sorge vor einem weiteren Anwachsen der dritten Corona-Welle in der zweiten Aprilhälfte zu einer bundesweit regulierten Verschärfung der Lockdown-Regeln. Seit Anfang Mai gehen die Corona-Neuerkrankungen in Deutschland nun zurück. Das dürfte wohl neben einem saisonalen Effekt auch auf die endlich in Fahrt gekommene Impfkampagne zurückzuführen sein. Der Lockdown dürfte in absehbarer Zeit aufgehoben werden können. Insbesondere die private Konsumnachfrage dürfte davon profitieren und zusammen mit der robusten Nachfrage aus dem Ausland die Wirtschaftsleistung laut IWH-Flash-Indikator im zweiten Quartal 2021 um 2,1% und im dritten Quartal um 2,4% steigen lassen.

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Globalisation in Europe: Consequences for the Business Environment and Future Patterns in Light of Covid-19

Sergio Inferrera

in: IWH-CompNet Discussion Papers, No. 2, 2021


In this paper, I study the consequences of globalisation, as measured by the involvement of firms in GVC, on the business environment. In particular, I focus on concentration and productivity, firstly by estimating robust elasticities and then isolating the exogenous component of the variation in the participation in GVC. To this aim, I exploit the distance between industries in terms of upstreamness and downstreamness along the supply chain. The evidences suggest that involvement in international supply chains is positively related to concentration at the sector level and positively associated with aggregate productivity, an effect that is driven by the firms at the top of the productivity distribution. Finally, I relate these findings to the current pandemic, going beyond the lack of official statistics and estimating GVC participation for 2020 at the country-level through real time world-seaborne trade data, providing evidences on the re-absorption of the Covid shock in several European economies.

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Pandemie verzögert Aufschwung – Demografie bremst Wachstum

Projektgruppe Gemeinschaftsdiagnose

in: Dienstleistungsauftrag des Bundesministeriums für Wirtschaft und Energie, No. 1, 2021


Das erste Jahr der Corona-Pandemie stand in Deutschland im Zeichen extremer Schwankungen der ökonomischen Aktivität und einer massiven Lähmung der Binnenwirtschaft. Der kräftige Erholungsprozess nach dem Ende des Shutdowns im vergangenen Frühjahr kam im Zuge der zweiten Infektionswelle über das zurückliegende Winterhalbjahr insgesamt zum Erliegen, wobei es große Unterschiede zwischen Industrie und Dienstleistern gibt. Angesichts des aktuellen Infektionsgeschehens gehen die Institute davon aus, dass der derzeitige Shutdown zunächst fortgesetzt wird und die zuletzt erfolgten Lockerungen wieder weitgehend zurückgenommen werden. Erst ab Mitte des zweiten Quartals setzen Lockerungsschritte ein, die es den im Shutdown befindlichen Unternehmen erlauben, ihre Aktivitäten nach und nach wieder aufzunehmen. Bis zum Ende des dritten Quartals sollten dann alle Beschränkungen aufgehoben worden sein, weil bis dahin insbesondere mit einem weitreichenden Impffortschritt zu rechnen ist. Insgesamt dürfte das Bruttoinlandsprodukt in diesem Jahr um 3,7% zulegen. Die deutliche Erholung im zweiten Halbjahr 2021 wirkt sich auch erheblich auf die Jahresdurchschnittsrate für das Jahr 2022 aus, die nach vorliegender Prognose 3,9% beträgt.

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Economic Mobility Likely to Increase Significantly after Relaxation – but also Number of COVID-19 Cases

Oliver Holtemöller Malte Rieth

in: IWH Policy Notes, No. 3, 2021


In Germany, measures to contain the coronavirus were relaxed in some areas at the beginning of March; in many places, for example, the restrictions on private and public gatherings were eased, and retail stores are increasingly able to receive customers again. The aim of these decisions is to allow for more economic mobility and personal contact between people. However, the frequency of contact is a major factor influencing the rate at which the coronavirus spreads, especially since the relaxations have so far not been accompanied by a systematic testing strategy; and vaccination progress has so far also fallen short of expectations. Estimates based on a model of the relationship between containment measures (Oxford COVID-19 Government Response Tracker, Stringency Index), economic mobility (Google Mobility Data), new corona infections, and deaths with data from 44 countries suggest that the recent relaxations increase economic mobility by ten percentage points and the number of new infections and deaths in Germany by 25%. Because both continued lockdown and relaxations have significant negative consequences, it is even more important to enable further relaxations through better testing and quarantine strategies and by increasing the pace of vaccination without putting people's health at risk.

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Konjunktur aktuell: Neue Infektionswelle unterbricht wirtschaftliche Erholung

Arbeitskreis Konjunktur des IWH

in: Konjunktur aktuell, No. 1, 2021


Die globale Produktion hat nach dem dramatischen Einbruch vom vergangenen Frühjahr wieder deutlich zugelegt. Vor allem Ostasien erholt sich rasch, während das BIP im Euroraum zuletzt zurückging. Von Seiten der Wirtschafts politik sind die Bedingungen für eine Erholung der Weltwirtschaft insgesamt günstig. In Deutschland dürfte mit fortschreitender Impfkampagne und schrittweiser Aufhebung der Beschränkungen eine Normalisierung des Konsumverhaltens privater Haushalte die Konjunktur beflügeln. Im Jahr 2021 wird das BIP um 3,7% zunehmen, nach einem Rückgang um 4,9% im Jahr 2020. In Ostdeutschland fällt sowohl der Rückgang als auch der Wiederanstieg deutlich geringer aus.

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