BERLIN (Reuters) - The German government's council of economic advisers expects Europe's largest economy to shrink less than initially feared this year thanks to a strong summer, but a second wave of the COVID-19 pandemic is clouding the growth outlook for next year.
"We've not yet overcome the coronavirus crisis," council head Lars Feld said, adding that the economic recovery remained fragile due to the rapid rise in new coronavirus infections.
"Further developments depend on how the pandemic can be contained and how other economies abroad fare," Feld said in reference to Germany's relatively large reliance on exports.
The council now sees the economy shrinking by 5.1% this year which translates into a calendar-adjusted and internationally comparable drop of 5.5%. In June, it had forecast -6.5% (or -6.9% in calendar-adjusted terms).
This means that the economic devastation caused by the pandemic could be smaller than the shock suffered during the global financial crisis in 2009, when the German economy shrank by 5.6%.
For 2021, the council lowered its GDP growth forecast to 3.7% from its previous estimate of 4.9%. The advisers expect economic output to shrink slightly in the fourth quarter and barely grow in the first quarter as a second wave of infections has led to renewed lockdown measures.
The council lauded the various rescue and stimulus measures put in place by Chancellor Angela Merkel's government and European Union leaders as mostly right and effective.
It cautioned, however, that the EU should not make its debt-financed 750 billion euro ($881 billion)recovery funds a permanent tool unless member states transferred fiscal sovereignty to Brussels.
They also said the European Central Bank should end its Pandemic Emergency Purchase Programme (PEPP) as soon as the recovery was taking hold because otherwise it would lower incentives for member states to use the EU's crisis aid loans.
(Reporting by Michael Nienaber, editing by Thomas Escritt and Emma Thomasson)