Still cautious optimism: Researchers drastically lower GDP forecast

The corona pandemic hits the German economy with great force. Economic experts from the IMK are therefore predicting a stronger drop in GDP than previously assumed. Germany has the worst behind it, however.

In view of the ongoing Corona crisis, economic researchers at the Hans Böckler Foundation have lowered their economic forecast for the current year. The gross domestic product (GDP) is expected to drop by 6.2 percent in 2020, the economic experts from the Institute for Macroeconomics and Economic Research (IMK) of the union-related foundation wrote in a forecast. In April, the researchers had assumed a four percent decline. To do this, they slightly raised the forecast for 2021 and now expect GDP growth of 3.8 percent for the coming year.

Overall, the economic policy reactions would have prevented worse, the researchers said. "The German economy has bottomed out as a result of the corona pandemic and is heading for a moderate recovery path in the third quarter of 2020," they said. "But the level before the outbreak of the crisis will probably only reach German gross domestic product (GDP) again in 2022."

The aid programs, the expected European development fund and Germany's multi-billion euro stimulus package had a stabilizing effect, the authors say. "Economic policy in Germany quickly did the right thing in many fields to mitigate the economic consequences of this dramatic crisis," said IMK Scientific Director Sebastian Dullien.

Despite the effective tool of short-time work to secure jobs, the study found that increasing unemployment cannot be avoided. An average of 500,000 unemployed are expected to be added each year, and another 130,000 in the coming year. This would correspond to an unemployment rate of 6.3 percent.

Exports and investments collapse

Despite all criticism, such as whether the temporary cut in value added tax effective from Wednesday onwards is effective, the stimulus package totaling 130 billion euros for this and next year is a "noteworthy positive impulse for consumption and investment", the IMK- Researcher. However, the 20 billion euros planned for the VAT reduction could have been used more effectively, for example through a higher child allowance, it is said.

The researchers are pessimistic about German foreign trade. "The global economic crisis will hit German exports hard this year," said the IMK. The researchers expect exports to decline by 12 percent in 2020. Accordingly, imports also collapse and decrease by 10.4 percent. Researchers expect a recovery for foreign trade in the coming year, but the losses could not be made up for "by far" at first. The IMK forecasts an increase in exports by 4.1 percent in 2021 and by 6.5 percent in imports.

A drastic slump in investment can be expected, with the exception of construction investment, which should remain relatively robust, the researchers said. They expect companies' equipment investment to drop 18.6 percent this year as a result of the corona shock. In 2021, they should then increase by 7.7 percent.