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Federal Government Expects Deep Recession Due to Corona Crisis message

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By Andreas Kiler

BERLIN (Dow Jones) – The Federal Government has drastically reduced its forecast for German economic development this year in view of the Corona crisis. A 6.3 percent decline in gross domestic product (GDP) is now expected, as the Ministry of Economic Affairs announced. In the new spring projection, which forms the basis for the tax estimate from May 12th to 14th, the ministry predicts an increase in GDP of 5.2 percent again in 2021.

“The effects of the corona pandemic lead our economy into a recession after ten years of growth,” said Federal Minister of Economics Peter Altmaier (CDU). In order to keep the economic consequences as low as possible, the government “countered with an unprecedented protective shield of over 1 trillion euros”. The aim must be “that we preserve the substance of our economy, that we accompany our companies and our employees through this crisis.”

Now one has to “start economic and social life with eyes”. The protection strategy pursued because of the corona pandemic must now be intelligently developed. “We shouldn’t risk a second high increase in the number of infections,” warned the Minister of Economic Affairs. “Because only if we start economic and social life with eyes, can we start a slow recovery again in the second half of the year.”

The government’s projection takes into account that far-reaching measures to limit social contacts in public space have been maintained since mid-March and throughout April. After that, “a gradual and moderate relaxation of behavioral measures is assumed”. The sharpest slump in economic output will take place in the course of the second quarter of this year. After that, economic activity will pick up.

Equipment investments plummet

According to the forecast, private consumer spending will decrease by 7.4 percent in 2020, but increase by 6.5 percent in 2021. In the forecast period, government consumer spending continued to support demand, with an increase of 3.7 percent in 2020 and an increase of 1.3 percent in 2021. Government investment spending will also increase by 3.9 percent in 2020 and 2.3 percent in 2021.

Equipment investment is projected to decrease 15.1 percent this year and to grow 8.7 percent next year. Altmaier’s economic experts estimate a 1.0 percent decline in 2020 and a 1.1 percent increase in 2021 for construction investments. “Investments in equipment are closely related to the capital-intensive export industry,” emphasized the ministry. As a result of the pandemic-related recession in manufacturing and a general increase in uncertainty, investments in equipment are expected to decline significantly in the first half of 2020.

With a gradual economic recovery, however, they should pick up again somewhat in the further forecast period. The demand for construction investments will be driven on the one hand by the continuing low interest rate environment and also by increased liquidity, but will also suffer from falling incomes at the same time. In addition, shutdown measures such as border closings and increased uncertainty are also having an impact on construction.

Exports decrease significantly in a global recession

The Ministry of Economic Affairs stressed that the effects of the corona pandemic are plunging the global economy into a severe recession, the magnitude of which will exacerbate the 2008/09 financial crisis. Due to the negative development of the sales markets, German exports would decrease by 11.6 percent in 2020. Next year they should rise again by 7.6 percent.

The lower domestic demand and the lower need for wholesale goods from abroad, however, had an impact on imports. Not least because of the extensive measures to support income and demand, imports fell by 8.2 percent, but not as sharply as exports. An increase of 6.5 percent is expected in the coming year. As a result, the German current account surplus in relation to nominal gross domestic product should decrease in 2020 and remain significantly below the level of 2019 in 2021 as well.

The job market is “under a lot of pressure”. Hospitality, trade and business services, which also include temporary employment, are particularly affected. Short-time work will increase to an unprecedented extent in March and April and prevent many layoffs. Unemployment is expected to rise to 5.8 percent on an annual average. The number of unemployed is expected to increase to 2.62 million people in 2020 from 2.27 million last year, but then to drop to 2.46 million in 2021.

Contact the author: andreas.kissler@wsj.com

DJG / ank / apo

(END) Dow Jones Newswires

April 29, 2020 08:00 ET (12:00 GMT)



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