German economic recovery slow and steady as lockdowns cause short-term delays

Author: Morgan Condon

2021/04/15

LONDON (ICIS)--Germany's economic recovery is on the horizon but renewed shutdowns and slow vaccination rollouts may act as a roadblock, a cohort of economic researchers on Thursday.

The Joint Economic Forecast anticipates that German GDP will increase by 3.7% in 2021, followed by a further 3.9% in 2022, with normal output levels expected around the start of the coming year.

Relief has been delayed in early 2021 due to the new wave of coronavirus cases and the lockdown measures implemented to stop the further spread of infection.

“Economic output is likely to have dropped by 1.8% in the first quarter due to the continuing shutdown,” said the chief economist at RWI – Leibniz Institute for Economic Research, Torsten Schmidt.

“We expect a vigorous expansion of economic activities as the measures are gradually lifted over the course of the six months through the summer, especially in the services sector that was particularly affected by the pandemic.”

Consequently, the 2021 forecast was revised down 1 percentage point compared to the previous forecast released in the autumn of 2020, as restrictions are likely to be lifted gradually.

Further easing is not expected until the middle of the second quarter, as restrictions could be in place until the end of the third quarter.

The easing of restrictions is expected to boost employment, which is expected to rise an average of 26,000 roles over the course of the year.

This rise is expected to increase to 539,000 for the coming year, with pre-crisis levels being met in the first half of 2022.

As the economy has needed economic stimulus, public budgets will register a  public deficit of €159bn in 2021, increasing slightly on the previous year, and government investment is likely to continue expanding,

The general government budget deficit in relation to GDP is expected to remain in line with previous estimates for 2021 at 4.5%, narrowing to 1.6% in 2022.

Production is expected to feel the effects on a longer-term basis, as the current forecast anticipates levels to remain 1.1% below pre-pandemic levels between 2020-24.

Another issue Germany’s manufacturing sector faces is its ageing workforce, which indicates the rate of potential growth is expected to decline by around one percentage point by 2030.

Vaccine and tests may still face bottlenecks and delays, and the prospect of new coronavirus variants could cause economic recovery to stall as lockdowns are implemented once again.

The Joint Economic Forecast is collated by the German Institute for Economic Research, the Ifo Institute, the Kiel Institute for the World Economy, the Halle Institute for Economic Research and the RWI on behalf of the German Federal Ministry for Economic Affairs and Energy.