Bunprecedented slump, but not a complete crash: The most important economic policy advisory body of the federal government expects a significant decline in economic performance due to the corona pandemic, but remains significantly more optimistic than other economists.
This was announced on Monday by the expert council, also known as “Wirtschaftsweise”, when a 111-page special report was published. Estimates such as those of the Munich Ifo Institute, according to which the German gross domestic product (GDP) could shrink by up to 20 percent this year, did not want to be followed by the three-member council after the departure of Isabel Schnabel and Christoph Schmidt.
In their report, Lars Feld, Achim Truger and Volker Wieland outline the effects of the corona shock on the German economy in three scenarios: All three have in common that the crisis is reflected in the emerging economic recovery in – the January values for production, sales and Incoming orders in industry had indicated strong growth for the first quarter of 2020 – had “abruptly” interrupted and a recession in the first half of the year “will now be unavoidable”.
In the first and most likely “base scenario”, the experts expect GDP to decline by 2.8 percent this year. This occurs when the measures to contain the virus epidemic take effect quickly and the economic and political situation normalizes again over the summer. For 2021, they then expect a healthy plus of 3.7 percent.
Significantly delay recovery
However, should there be large-scale production shutdowns or should the current shutdown of all activities be continued for longer than currently planned, it is – not surprisingly – to expect a much more severe slump in economic output. In the risk scenario, the “economic practices” expect a 5.4 percent decline in GDP this year.
In this case, the development of economic performance can be described in the form of a V-curve and is likely to drop 10 percent below the current level in the second quarter that is now beginning. After all, it should be assumed that a real catch-up and a GDP increase of 4.9 percent in the coming year.
Finally, the “economic practices” do not consider it impossible that the measures to contain the Corona virus could persist beyond the summer, i.e. restaurants and retailers should have closed even in early autumn. This could then significantly delay an economic recovery and lead to GDP development in the form of a long U. “In this risk scenario, the policy measures taken may not be sufficient to prevent profound damage to the economic structure through bankruptcies and layoffs,” wrote Feld, Truger and Wieland.
A wide range of options
Worsened financing conditions and the increased and solidified uncertainty could also slow investments and lead to reluctance to buy in households. In such a scenario, there is also the risk of negative feedback via the financial markets or the banking system. Economic output this year would collapse by 4.5% in this third scenario and would only increase very slowly in the coming year by 1.0%.