GDP is expected to contract steeply this year due to the global health crisis and associated containment measures weighing heavily on domestic and foreign demand. On the other hand, the government’s loose fiscal stance should cushion the fall somewhat, paving the way for a strong recovery next year. A prolongation of the crisis is a key downside risk, however. FocusEconomics Consensus Forecast panelists project the economy to contract 6.1% in 2020, which is up 0.2 percentage points from last month’s projection, and to grow 4.8% in 2021.
Harmonized inflation moderated to 0.5% in May from 0.8% in April, due to low oil prices and as government-imposed restrictive measures weighed on demand. Price pressures should remain soft this year due to still-low oil prices and weaker demand. Supply chain disruptions could provide upward pressure, however. Our panelists project average inflation of 0.6% in 2020, which is down 0.1 percentage points from last month’s projection, and 1.4% in 2021.
FISCAL
Government opens spending taps further in June to boost the economy In early June, the German government announced fresh stimulus of EUR 130 billion to kickstart the economy, bringing the total fiscal stimulus up to around EUR 1.2 trillion (roughly equivalent to around 35% of 2019 GDP) which has been unleashed as part of efforts to buttress the economy against fallout from Covid-19. The new stimulus equals around 4% of GDP and encompasses numerous measures, including reducing the tax burden through temporarily lowering VATs until the end of this year, as well as further liquidity and loan support of around EUR 25 billion for SMEs through August, conditional on at least a 60% annual drop in sales in April and May. In addition, the government announced extra one-off child allowance; a EUR 50 billion fund focused on combating climate change; capping social contributions until at least next year.
The economy is expected to have contracted sharply in the second quarter due to Covid-19. In April, industrial output fell at the steepest clip since at least the early 1990s, particularly on the back of weakness in the manufacturing sector amid the global lockdown weighing on foreign demand. The composite PMI, furthermore, remained in contractionary territory throughout the quarter on broad-based weakness in the private sector. Meanwhile, boding ill for household spending, the unemployment rate continued to rise in May while retail sales plummeted in April. More positively, the composite PMI rose in May and June, suggesting activity recovered somewhat towards the end of the quarter following the lifting of lockdown restrictions. In other news, the government announced fresh stimulus of EUR 130 billion in early June. Partly financed through net new borrowing, the package focuses on reducing the tax burden and further liquidity support.
GDP is expected to contract steeply this year due to the global health crisis and associated containment measures weighing heavily on domestic and foreign demand. On the other hand, the government’s loose fiscal stance should cushion the fall somewhat, paving the way for a strong recovery next year. A prolongation of the crisis is a key downside risk, however. FocusEconomics Consensus Forecast panelists project the economy to contract 6.1% in 2020, which is up 0.2 percentage points from last month’s projection, and to grow 4.8% in 2021.
Harmonized inflation moderated to 0.5% in May from 0.8% in April, due to low oil prices and as government-imposed restrictive measures weighed on demand. Price pressures should remain soft this year due to still-low oil prices and weaker demand. Supply chain disruptions could provide upward pressure, however. Our panelists project average inflation of 0.6% in 2020, which is down 0.1 percentage points from last month’s projection, and 1.4% in 2021. Outlook improves LONG-TERM TRENDS | 3-year averages Germany 2016-18 2019-21 2022-24 Population (million): 82.6 83.0 82.8 GDP (EUR bn): 3,241 3,410 3,727 GDP per capita (EUR): 39,229 41,129 45,016 GDP growth (%): 2.1 -0.3 1.6 Fiscal Balance (% of GDP): 1.4 -2.8 -0.5 Public Debt (% of GDP): 65.5 67.5 66.4 Inflation (%): 1.3 1.1 1.6 Current Account (% of GDP): 7.9 6.6 6.2 Jan Lammersen Economist FOCUSECONOMICS Germany FocusEconomics Consensus Forecast | 36 July 2020 to benefit net income; and financial support for local governments struggling with reduced tax income. Taken together, the fiscal response of the German government should pave the way for a strong economic recovery next year. However, the outlook hinges not only on domestic developments, especially the possibility of a serious second wave of infections, but also on the return of foreign demand, which helped Germany overcome previous crises and currently seems unlikely to provide a significant boost to the economy. Carsten Brzeski, chief Eurozone economist at ING, noted: “it is not only the size of the packages which is remarkable but also the fact that the German government has made a complete U-turn in its approach to fiscal policy.” FocusEconomics Consensus Forecast panelists expect the economy to enter a deep recession, with GDP contracting 6.1%, which is up 0.2 percentage points from last month’s forecast. For 2021, the panel expects the economy to rebound, with GDP growing 4.8%.
REAL SECTOR
Industrial production contracts at sharpest pace on record in April Industrial output slid 17.9% on a calendar-adjusted month-on-month basis in April (March: -8.9% mom). April’s figure marked the steepest contraction on record. The reading was largely due to a dive in intermediate, consumer and capital goods output. Looking at sectors, production in the automotive industry collapsed at a particularly steep pace. Construction sector production fell, while energy output declined at a softer rate than in March. On a year-on-year basis, factory output fell at a more pronounced rate of 25.3% in April (March: -11.3%). The reading marked the worst result on record. Accordingly, the trend pointed down, with the annual average variation of industrial production coming in at minus 6.0%, down from March’s minus 4.1%. The reading was heavily influenced by the government-imposed restrictive measures to curb the spread of Covid-19. Going forward, the slump in the industrial sector should ease somewhat given the gradual lifting of lockdown measures at home and abroad; however, foreign demand is likely to remain weak, and it will take some time before the sector fully recovers. Panelists polled by FocusEconomics expect that industrial production will fall 11.3% in 2020, which is down 1.8 percentage points from last month’s forecast. For 2021, the panel sees industrial production increasing 5.5%.
OUTLOOK
Consumer sentiment to remain pessimistic in July despite strong rise Consumer confidence is expected to recover further from the Covid-19 shock at the opening of the third quarter; however, sentiment is forecast to remain pessimistic. The forward-looking GfK Consumer Climate Index is projected to rise from June’s minus 18.6 to minus 9.6 in July—the third lowest value ever recorded in the history of the index. The expected uptick reflected healthier backward-looking data for June, which is released at the same time and underpins the July estimate. Economic expectations returned to positive territory for the first time in four months and marked the highest level since January 2019. The notable swing is due to the government’s strong fiscal response to the Covid-19 crisis, with stimulus now amounting to roughly EUR 1.2 trillion (around 35% of 2019 GDP). By extension, income expectations improved markedly and also returned to positive territory. This comes despite increasing short-time work and unemployment, depressing incomes. Given the above, propensity to consume rose as well. According to Rolf Bürkl, GfK consumer expert: “The extensive support provided by the economic stimulus packages, such as the announcement of a temporary reduction in value-added tax (VAT), is certainly a contributing factor [behind improved consumer sentiment]. Provided that retailers and manufacturers also pass these reductions on to consumers, it can be assumed that one or two planned purchases will instead be made in the second half of 2020, thereby supporting consumption this year.” FocusEconomics Consensus Forecast panelists expect private consumption to fall 5.7% in 2020, which is up 0.1 percentage points from last month’s estimate. For 2021, panelists see private consumption growing 4.9%.
