Germany’s post-virus forecast better than expected, say top economists

At a press conference, five economic institutes, including the ifo, published their traditional joint diagnosis. It is published twice a year and serves as an orientation guide for the government to plan the budget. EPA-EFE/OMER MESSINGER

Germany’s five most important economic institutes insist an economic upturn is on the horizon, as part of their biannual spring forecast published on Wednesday (8 April). EURACTIV Germany reports.

German economists have been investigating for weeks how much Germany’s coronavirus bill will total, as one study after the other has been published – with sometimes strikingly different results.

Particularly prominent was the discrepancy between the results of economic institute Ifo – which considered a possible collapse of up to 20.6 percentage points – and the German Council of Economic Experts, which even in the worst-case scenario only expected a single-digit growth slump.

The catalogue of forecasts is one document richer as of today.

At a press conference, five economic institutes, including the Ifo, published their traditional joint diagnosis. It is published twice a year and serves as an orientation guide for the government to plan the budget.

Limitations of economic forecasting during coronavirus pandemic

Germany’s economy has gone into artificial hibernation to stop the spread of the coronavirus. Initial forecasts suggest this will be expensive but opinions about the extent vary widely. In an interview with EURACTIV Germany, the head of the German Institute for Economic Research (DIW), Marcel Fratzscher, explains the limitations of economic forecasts.

It’s gonna get worse before it gets much better

The spring forecast is closer to the optimism of the German Council of Economic Experts, as it expects economic output to shrink by 1.9% in the first quarter, and then by 9.8% in the second, single-digit figures, as the Council also assumed. And for 2020, the institutes expect a 4.2% slump.

However, the forecast places a great degree of trust in catch-up forces, as growth is expected to pick up strongly in 2021 with recoveries expected to begin as early as the third quarter of 2020.

According to the group of institutes, there will be no need for an economic stimulus package as the economy will grow by 5.8% in 2021.

While Germany’s debt ratio will rise to 70% in the medium term but will fall again in 2021, the country’s unemployment rate is expected to rise to 5.9% and up to 2.4 million people will be forced into short-time work.

“After 2009, this would be the deepest recession since the end of the Second World War,” said Ifo economic boss Timo Wollmershäuser.

Coronavirus 'very likely' to push Europe into recession, Commission warns

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Commitment to a scenario

Already in terms of methodology, the joint economic forecast differs from previous coronavirus forecasts in one essential point.

So far, they presented several scenarios that take into account the many uncertainties of the COVID-19 pandemic, for example with regard to the lockdown period or the effectiveness of public support, meaning there were no concrete figures, but rather wide ranges of possible outcomes.

The institutes are now daring to make clear announcements. Instead of calculating scenarios, they agreed on clear assumptions – and optimistic ones at that.

For example, they assume that the lockdown will end on 20 April, which is currently being cautiously communicated by the government as the earliest date for the first store openings. The institutes also have full confidence in the government’s economic protection shield and do not expect companies to file for insolvency.

Despite severe transmission problems in the video chat, Claus Michelsen, head of the department for economic affairs at the German Institute for Economic Research (DIW) attempted to present a reality check.

He said it was “by no means a foregone conclusion” that slump and recovery would be as “frictionless” as the diagnosis assumed, for example, that companies would largely stay alive and jobs would be maintained. And if these assumptions turn out to be wrong, one would have a “bigger problem”.

In fact, pessimistic tones have already been heard from the DIW.

So far, Director Marcel Fratzscher called the figures of the German Council of Economic Experts “too optimistic”, and told EURACTIV in an interview that the DIW would tend to be more in line with the pessimistic figures of the Ifo in the calculations for the joint diagnosis.

Eurogroup fails to progress on economic response to pandemic

After a 16-hour teleconference that concluded on Wednesday morning (8 April), eurozone finance ministers failed to find an agreement on the economic package to tackle the  economic impact of the coronavirus.

Wealthy people should contribute more

During the press conference, this discrepancy between preliminary forecasts and the final result was highlighted.

Wollmershäuser said that focus was on the scenario that had looked most realistic just two weeks ago. It also corresponds to one of the – optimistic – scenarios of the original Ifo report. However, should the lockdown continue for a longer period of time, Wollmershäuser expects an additional growth slump of 1.5% per month.

Oliver Holtemöller of the Halle Institute for Economic Research (IWH) presented ideas for hedging against uncertainties.

Next year, he said, one would have to ask how the reduction of debt would be distributed after the upswing, adding that the tax system could be used to make wealthy people pay more. According to Wollmershäuser, a new debt crisis in the eurozone must be avoided “at all costs”.

However, when they were asked whether they would recommend coronabonds for this purpose, the economists did not comment.

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[Edited by Sam Morgan]

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