Posted by on June 20, 2020 8:21 am
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Categories: EU

“Economic bottom has been overcome”

Courtesy of RWI Essen



The RWI expects German economic growth to slow by 5.8 percent this year due to measures to combat the coronavirus pandemic. The economy is expected to grow by 6.4 percent in the coming year. The unemployment rate is expected to be 5.9 percent this year and 5.3 percent next year. A significantly reduced demand, lower energy prices and the temporary reduction in value added tax have an impact on inflation. It should be 0.2 percent this year and 1.3 percent next year. Taking the corona measures and their enormous costs into account, the deficits of public budgets are expected to amount to 176 and 62 billion euros in 2020 and 2021, respectively.



The main results:



RWI expected this year because of the corona pandemic a decline in German GDP of 5.8 percent. For 2021, it then expects growth of 6.4 percent again.



The shutdown of economic activity in March and April led to a massive decline in production. It has only started to gradually ramp up production since the end of April. Falling numbers of new infections led to the gradual withdrawal of restrictions. However, a complete lifting is still not in sight. Nevertheless, there are many indications that the low point has been passed.



In view of the corona crisis, companies have severely restricted their investment demand. Equipment investment in the first quarter fell by almost 7 percent compared to the previous quarter. Construction investments, on the other hand, were initially expanded by 4 percent. But here too there is a slowdown in the second quarter. In the coming year, investments should receive strong stimulus from the federal government’s stimulus package.



The companies made massive use of the short-time working instrument extended by the federal government . Short-time working was registered for over 8 million employees in April alone . A number of measures to limit the pandemic are likely to continue in the coming months. At the same time, an increase in the number of bankruptcies is expected. It can therefore be assumed that unemployment will continue to rise, albeit at a slower pace. The unemployment rate is expected to rise to 5.9 percent this year, and to fall to 5.3 percent in 2021.



The inflation is mainly influenced by lower energy prices and the temporary VAT reduction the second half of the 2020th In addition, there are price-dampening effects due to a clearly limited demand. These will clearly outweigh the price-driving effects of supply-side restrictions. The inflation rate should be 0.2 percent this year. Inflation will only pick up again in the coming year; a value of 1.3 percent is expected for 2021.



The situation in public budgets has deteriorated considerably as a result of the corona crisis. This results in a budget deficit of around 176 billion euros and 62 billion euros, respectively, for 2020 and 2021. In relation to GDP, the financing balances are -5.1 or -2.0 percent. On the revenue side, there has been a significant drop in tax revenue, while at the same time there is higher expenditure for increased social benefits. Added to this are the expansion of short-time work benefits, tax measures and the economic stimulus package with a total of around 130 billion euros.



RWI economic chief Torsten Schmidt said of the current situation in the German economy: “The low point of the crisis is likely to be over. Thanks to the gradual easing and the massive fiscal stimulus, we already expect an economic recovery in the summer. The strength of the recovery will largely depend on the further development of the pandemic in Germany and the rest of the world. ”