According to the latest Bundesbank projections, the German economy will recover following a deep recession in the second quarter of this year. Economic output is estimated to shrink by 7% in 2020, but in the next two years, real gross domestic product (GDP) will then increase by 3 to 4% per year. The Federal Government’s new economic stimulus package was agreed after the forecast was finalised. “Government finances are making a substantial contribution to stabilisation,” said Bundesbank President Jens Weidmann. “Further stimulus is also appropriate in light of the current situation, and I welcome the economic stimulus package.” As Mr Weidmann continued, the economic outlook is now noticeably more favourable as a result. 

As a result of the pandemic and the measures taken to contain it, economic output saw an exceptionally sharp drop in the first quarter of 2020. The Bundesbank projections indicate that there will be another and overall even greater decline in the second quarter, although the economy had already bottomed out in April and is starting to grow again. However, the recovery will remain subdued to begin with, as the negative effects caused by the pandemic and the measures taken to combat it will likely diminish only gradually. The projections assume that an effective medical solution for the pandemic will become available in mid-2021, which will then give a fresh boost to the recovery. “However, there is still a very high degree of uncertainty about what lies ahead for the economy,” Mr Weidmann stressed.

The crisis is also impacting the labour market. Despite large-scale short-time working, unemployment will rise considerably for a period of time. According to the Bundesbank’s projections, however, there will be no significant lasting damage to the labour and goods markets. This will be counteracted by the comprehensive package of economic policy support measures and the stabilising international environment underlying the forecast. The forecast indicates that consumer price inflation will ease considerably this year, amounting to only 0.8%. Over the next two years, however, inflation rate will rebound to 1.1% and 1.6%, respectively. This is mainly attributable to energy prices, which will initially fall as a result of the most recent slump in oil prices and then rise sharply again. By contrast, the core rate excluding energy and food will remain comparatively stable. Although falling demand will put downward pressure on the prices of services and industrial products, this will be mitigated by other inflationary factors caused by the pandemic.  

Government finances will stabilise macroeconomic developments considerably even without the recent economic stimulus package, which is not included in the projection. This is due to the effect of the automatic stabilisers on the one hand and comprehensive assistance measures on the other. According to the Bundesbank projection, a deficit of 6% of GDP and a debt ratio of around 75% are envisaged this year. As the economy recovers and assistance measures come to an end, government finances will improve in subsequent years. The deficit ratio will be significantly lower again in 2022. The debt ratio will also decline somewhat, but will still be well above its pre-crisis level of around 60%.

In addition to the baseline scenario, the Bundesbank presented a less severe and a more severe scenario. They see real GDP decrease this year by either 3% or as much as 10%. In the less severe scenario, a rapid catch-up will start next year (+6%), whereas in the more severe scenario, GDP will continue to decline (-1%).

Some of the specifics of the economic stimulus package recently agreed by the Federal Government only after the forecast was completed have yet to be finalised. On the basis of an initial rough estimate, the government deficit could be up by 1½ percent of GDP this year and by ½ percent of GDP next year compared with the projection. Real GDP could be more than 1% higher this year and around ½% higher next year (growth rates would be accordingly larger this year and smaller next year). In particular, the value added tax cut will have a noticeable impact on price developments. A full and immediate pass-through would reduce the rate by around one percentage point this year and, mirroring this development, increase it by one percentage point in the coming year. However, only an incomplete pass-through is expected.

Projection June 2020

Source: Federal Statistical Office. 2020 to 2022 Bundesbank projections.