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.

The corona pandemic caused the global economy to collapse dramatically in the first half of 2020. However, as activity picked up strongly again in the summer, a large part of the decline will likely be recovered in the second half of the year. The fiscal support mustered in response to the pandemic by advanced economies has been unprecedented in scale, even if not all the measures take effect in the current year. However, the pandemic is not yet under control. The number of infections and deaths has increased in recent months, especially in South America, India, and the USA, but also in Spain and France. Economic activities, such as tourism or transport services, will continue to be affected all over the world in 2021.

“Germany's gross domestic product fell much more sharply in the first half of 2020 than during the Great Recession, and it seems likely that the pandemic will leave lasting changes,” says Oliver Holtemöller, head of the Department Macroeconomics and vice president at the Halle Institute for Economic Research (IWH). While activity has risen sharply again since May, production in the manufacturing sector has not returned to precrisis levels. The recession has also reached the labour market: The number of employees fell by 1.5% between February and July 2020. Propped up by expansive fiscal policy measures and automatic stabilisers, disposable incomes have remained stable and private consumption is expected to grow strongly in the second half of the year. However, the structural changes forced by the pandemic will likely weigh on the economy over the forecasting period. Production capacities are likely to remain underutilised until 2022.

According to Holtemöller, East Germany seems less affected by the economic fallout from the pandemic than Germany as a whole. A lower number of infections has likely attributed to this trend. People’s mobility in East Germany has not receded as strongly during the pandemic as in Western Germany. Moreover, public service providers, whose production is expected to remain quite stable this year, have a higher share of total gross value added in the east than in Germany as a whole.

The general government balance will be –5.4% in relation to gross domestic product in 2020 and will then slowly decline. The main risk for the German economy is still the course of the pandemic. The current sharp rise in the number of infections in France and Spain may also jeopardise the recovery in Germany, as the economies are closely intertwined.

The long version of the forecast (Wirtschaft erholt sich vom Corona-Schock – aber keine schnelle Rückkehr zur alten Normalität) contains the following info boxes:

Box 1: General Assumptions (German)

Box 2: VAT reduction only partially passed on to consumers (German)

Box 3: On the latest revision of the national accounts (German)

Box 4: Estimation of the potential output (German)

Publication
Brautzsch, Hans-Ulrich; Claudio, João Carlos; Drygalla, Andrej; Exß, Franziska; Heinisch, Katja; Holtemöller, Oliver; Kämpfe, Martina; Lindner, Axel; Müller, Isabella; Schultz, Birgit; Staffa, Ruben; Wieschemeyer, Matthias; Zeddies, Götz: Wirtschaft erholt sich vom Corona-Schock – aber keine schnelle Rückkehr zur alten Normalität. Konjunktur aktuell, Jg. 8 (3), 2020. Halle (Saale) 2020.

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Konjunktur aktuell: Wirtschaft erholt sich vom Corona-Schock – aber keine schnelle Rückkehr zur alten Normalität

Arbeitskreis Konjunktur des IWH

in: Konjunktur aktuell, 3, 2020

Abstract

Die Corona-Pandemie hat die Weltwirtschaft im ersten Halbjahr 2020 drastisch einbrechen lassen. Im Sommer wurden viele Aktivitäten aber wiederaufgenommen, und ein großer Teil des Einbruchs dürfte im zweiten Halbjahr wieder wettgemacht werden. Einige wirtschaftliche Aktivitäten wie der Tourismus oder Verkehrsdienstleistungen werden allerdings noch eine Weile eingeschränkt bleiben.

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