Economic Outlook

German economy: V(irus)-shaped recession ahead

Kiel Institute Economic Outlook Germany, Nr. 65 (2020|Q1)

The spread of the coronavirus will have a considerable impact on the German economy. The economy will be hit in a situation in which it was just about to regain footing after the downturn of the past year. Recently, signs have been increasing that industrial production is finding its bottom and is gradually emerging from recession. The actual economic damage caused by the coronavirus can hardly be quantified at present. First, the effects are not yet reflected in available leading indicators. Second, the further development of the pandemic is uncertain, especially as the economic consequences depend to a large extent on the measures taken to contain the virus. For our forecast, we assume that the coronavirus will dampen economic activity, especially in the first half of the year, and that there will be noticeable catch-up effects thereafter. In this scenario, the economic picture will resemble a pronounced V-shape in the course of this year. It is already foreseeable that foreign trade will be significantly affected in the coming months. Trade with China but also with other regions particularly affected by the virus is likely to decline significantly. In this regard, delivery problems for intermediate goods could lead to noticeable production shortfalls. In addition, the spread of the virus is also likely to have a significant impact on the domestic economy. In particular, private households will probably cut back on leisure spending in order to avoid infection. In light of the uncertain development of the pandemic, we expect firms to postpone investment projects. At the same time, the impact on employment is likely to be small if the largest negative effects are indeed limited to the first half of the year. All in all, we expect a slight decline in gross domestic product of 0.1 percent for the current year. In our most recent winter forecast, we had still assumed an increase of 1.1 percent. In 2021, GDP is projected to grow quite strongly by 2.3 percent, also due to catch-up effects. However, the downside risks to our forecast prevail and, depending on the further development of the corona pandemic, significantly more negative scenarios are also possible.