IWH Summer Forecast 2021

Increase in Personal Contacts Spurs Economic Activity

June 15, 2021

 

This summer the economic outlook in Germany is bright. As the pandemic is in retreat, the restrictions that have hampered many service activities are likely to be gradually lifted, and a strong boost in private purchases can be expected. The IWH forecasts that gross domestic product will increase by 3.9% in 2021 and by 4.0% in 2022. Production in East Germany is expected to increase by 3% in both years, respectively.

In Germany, the pandemic severely dampened economic activity until April. However, registered unemployment did not rise, also due to short-time work regulations. Real disposable income was, in spite of the crisis, almost at the pre-crisis level already at the beginning of the year, while private consumption was 11% lower. It will pick up strongly in the course of the summer as economic life returns to normal. This will particularly benefit the retail trade, the hospitality industry and other providers of leisure activities.

Foreign demand for manufacturing products will also provide a strong stimulus. However, supply bottlenecks in the manufacturing sector are slowing the pace of expansion in Germany as elsewhere. It will probably take until the end of 2022 before capacity utilisation is back to normal.

The employment situation will start to improve in the second quarter of 2021, and registered unemployment will be declining in the course of 2021.

Inflation will remain well above 2% in the coming months, mainly due to base effects in the oil price.

Because fiscal policy is still expansionary in 2021, the general government budget deficit will rise from 4.5% in relation to gross domestic product (GDP) to 5.1% despite the economic recovering. In 2022, the deficit will decline significantly to 1.4%.
 

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