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Coronavirus: German economy recovering ‘more favourably’ than expected

Jill Petzinger
·Germany Correspondent, Yahoo Finance UK
·3-min read
07 August 2020, Mecklenburg-Western Pomerania, Torgelow: Employees prepare casting moulds in the mould making department of the Torgelow iron foundry. The company, which with 320 employees is one of the most important employers in Western Pomerania, had filed for insolvency in mid-July. Photo: Jens Büttner/dpa-Zentralbild/ZB (Photo by Jens Büttner/picture alliance via Getty Images)
In its autumn forecast, the IFO said that Germany’s annual average economic output will contract by 5.2% this year. Photo: Jens Büttner/picture alliance via Getty Images

The coronavirus pandemic plunged the global economy into a deep recession in the first half of 2020, and Europe’s largest economy was no exception. Germany experienced its worst recession in post-war history, with GDP sinking 2% in the first quarter and 9.7% in the second quarter.

The IFO Institute for Economic Research, one of Germany’s leading economic think tanks, noted in its forecast on Tuesday that Germany’s recession was milder than in other countries. It said this was due to the fact that Germany was able to get the spread of the pandemic under control “with less restrictive measures” than other countries. Industrial production, which is important for the economy, was less affected by lockdown measures, the IFO said.

Germany’s annual average economic output will contract by 5.2% this year, a slight improvement on -6.7% predicted earlier, according to the forecast.

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“The decline in the second quarter and the recovery are currently more favourable than we had expected,” IFO economic director Timo Wollmershäuser said in a statement.

Wollmershäuser noted that there is a high level of uncertainty in the forecasts “because nobody knows how the coronavirus pandemic will continue, whether there might not be a hard Brexit after all and whether the trade wars will be settled.”

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The German economy contracted by 9.7% in the second quarter of 2020, compared with the same period in 2019, as coronavirus lockdowns drove economic activity to a record quarterly low.

Economy minister Peter Altmaier said on 1 September that the government expects a decline of 5.8% for this year, compared with its April forecast of a 6.3% contraction in 2020. That puts the 2020 economic output almost on par with the 5.7% GDP contraction in 2009, at the height of the financial crisis.

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For 2021, however, the IFO expects growth of 5.1% instead of the 6.4% predicted earlier. The recovery will continue in 2022, with GDP forecast to grow at a rate of 1.7%, IFO researchers said.

The institute expects unemployment levels in Germany to rise from around 2.3 million last year to 2.7 million this year. For 2021, it forecasts a slight decrease to 2.6 million and then to 2.5 million in 2022.

The 2019 state surplus will plunge to -€170.6bn (-£156bn, -$200bn) this year, due to the government’s massive spending on stimulus measures, and a dramatic drop in revenues. The IFO notes that in 2021 the deficit will hit €86.9bn, and sit at about €68bn in 2022.