How will coronavirus affect the German economy?
US, WASHINGTON (ORDO NEWS) — The Council of Economic Experts under the Government of the Federal Republic of Germany (the so-called “Council of the Sages” whose task is to assess the economic situation and recommend to the government) presented several scenarios for the development and overcoming of the situation associated with the spread of coronavirus.
The first of these, “optimistic,” suggests that the numerous restrictive measures introduced in Germany in recent weeks will not last long, and the situation in the country will normalize during the summer. In this case, the economic power of Germany in 2020 will decrease by only 2.8 percent, and already in 2021 the GDP will grow by 3.7% compared to the previous year.
The second scenario – “pessimistic” – is based on a large-scale suspension of production, extension of restrictive measures, and freezing of the service sector. In this case, the decline in gross domestic product this year will reach 5.4%.
The third option, described by the “wise men”, suggests that the restrictions introduced will be valid all summer, but excludes the suspension of enterprises. At the same time, three council experts highlight as deteriorating financing opportunities and a general increase in uncertainty as aggravating circumstances, which threatens to reduce investment, passive consumer behavior and a corresponding drop in market conditions. According to economists, in this case, the GDP of Germany in 2020 will decrease by 4.5%.
All three options suggest that Germany is on the verge of the most noticeable drop in economic development since the financial crisis of 2008-2009: then the country’s GDP fell by 5.7%.
This is also evidenced by bleak news from a number of industries, including systemically important from the point of view of the welfare of Germany. In the automotive industry, reports of the closure of Volkswagen, Daimler, Opel, Ford and BMW were replaced by information on overproduction amid falling demand and the likelihood of layoffs: about 100 thousand jobs are threatened – that’s about 12 percent of those employed in the automotive industry and related fields. Various indicators of the country’s economic condition and consumer sentiment are not encouraging.
Business activity index ifo the Munich Institute for Economic Research ifo (Institut für Wirtschaftsforschung) calculates monthly on the basis of a survey of top managers of the country’s leading enterprises, underwent a record collapse in history in March.
The consumer sentiment index, calculated by the GfK Institute for Marketing Research, has also dropped to the lowest level since the global financial crisis. At the same time, the drop in depth – immediately by 5.6 points – is unprecedented since the advent of the barometer of consumer sentiment in 1994: against the backdrop of the spread of coronavirus, the country’s inhabitants are afraid of losing income and jobs, and there are not so many opportunities to spend now.
“The German economy is in a state of shock,” ifo director Clemens Fuest comments. His colleague, ifo market expert Klaus Wohlrabe, believes that the fall in GDP over the year will be much more noticeable than the “wise men” predict – from 5 to 20 percent: in the latter case, the crisis will be deeper than in times
The Great Depression of the 1930s. According to Wohlrabe, a more specific forecast is now impossible due to the unique circumstances surrounding the spread of the pandemic. So far it has primarily affected the service sector and trade, but the next step is production. The Institute of World Economy in Kiel believes that at best, we expect a drop in GDP of 4.5 percent, at worst – by 9.
In any case, in the coming months, those in charge will have to constantly face a difficult choice, comparing the risks to the life and health of people with the possible economic consequences of many decisions.
The losses that await Germany as a result of the crisis can be expressed in astronomical amounts with an abundance of zeros. Ifo estimates the damage to the German economy at 255-729 billion euros, and David Folkerts-Landau, the leading economist at Deutsche Bank, expects the pandemic to cost Germany one and a half trillion euros. However, the opinion of Folkerts-Landau gives reason for optimism.
The country will cope with such a huge burden – including due to the solid financial policy of recent years. Germany’s debt to creditors does not exceed 60 percent, the Ministry of Finance has been without new debts over the past few years, and only in connection with the pandemic the government has taken new loans (the recently agreed package of financial assistance totals 750 billion euros, 156 of which will be borrowed )
A sound approach to financing, from the point of view of Folkerts-Landau, will serve as the key to a quick recovery. “We expect the economy to rise from the fourth quarter of this year, and in 2021 the growth in gross domestic product will become noticeable,” he says.
According to an expert from Deutsche Bank, Germany will be one of the first to overcome the crisis and emerge from a difficult situation that has significantly intensified – thanks to a well-developed healthcare and industry system and sound financial policy. There will be two winners in the crisis, Folkerts-Landau believes: the Federal Republic and China.
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.