The fallout from the coronavirus pandemic is continuing to shape the German economy. Owing to the government-mandated containment measures and voluntary behavioural adjustments, economic output in 2020 will be significantly below last year’s level. According to the Bundesbank’s latest projections, gross domestic product (GDP) is set to fall by 5.5% this year in calendar-adjusted terms. However, strong economic growth of 3% and 4.5% is expected for 2021 and 2022, respectively.

“The economic recovery is being driven mainly by private consumption,” said Bundesbank President Jens Weidmann. “We expect the containment measures to be loosened gradually in spring 2021 thanks to medical advances and consumption opportunities to be taken again,” said Mr Weidmann, adding that the currently exceptionally high level of saving is set to decline sharply as a result.

At present, the German economy is likely to experience a limited setback because of the pandemic’s resurgence. As the containment measures have so far been concentrated in particularly contact-intensive services, GDP is unlikely to fall on a similar scale as in the spring, however. Mr Weidmann continued: “Our projections anticipate a sharp rebound in GDP after the final quarter of 2020 and the first quarter of 2021.”

Consumer prices this year were primarily affected by the temporary cut in VAT rates and the collapse in crude oil prices. According to the Bundesbank’s projections, this means that the inflation rate in 2020 will go down significantly to 0.4%. Next year, the reversal of the VAT cut and the introduction of CO₂ emission certificates will drive up prices such that consumer prices will rise by 1.8% despite the still subdued underlying trend. After adjustment for the VAT effect, core inflation excluding energy and food will probably be somewhat higher than 1% in both years.

Furthermore, as the projections show, price pressures will continue to rise as wages pick up again sharply and profit margins recover, meaning that consumer price inflation may be 1.3% in 2022 and 1.6% in 2023.

Public finances have been considerably stabilising the economy as a whole during the coronavirus crisis. According to the Bundesbank’s projections, the general government deficit will therefore probably reach around 5% of GDP this year, and the Maastricht debt ratio will rise to approximately 70%. Public finances are likely to improve subsequently as the economy recovers and the pandemic support measures come to an end.

Uncertainty caused by the pandemic

In order to take account of the high degree of uncertainty surrounding the economic outlook caused by the pandemic, two alternative scenarios were developed in addition to the baseline scenario. In a milder scenario, the economy will see a significantly faster and stronger recovery. By contrast, in a more severe scenario, GDP will not reach its pre-crisis level until the end of 2023, with potential output taking a substantial hit. The rate of inflation will then be perceptibly lower. From today’s perspective, the risks to GDP growth and inflation arising from the ongoing pandemic as well as from the external environment appear to be roughly balanced.

Projection December 2020