German GDP to drop by 6.5%

Even back in March, Germany's panel of economic advisers agreed that the unfolding coronavirus crisis would deal a severe blow to Europe's powerhouse and predicted a 2.8% drop in gross domestic product for 2020.

The calculation was based on the assumption that lockdowns would last for no more than five weeks and restrictions would be eased swiftly thereafter.

But the novel coronavirus wouldn't play along, and some restrictions are still in place today and keep weighing heavily on the economy.

Adapting to the realities on the ground

In a revised forecast presented Tuesday, the German economic experts conceded that the country's output would shrink by 6.5% this year, plunging the nation into its worst recession since the end of World War II.

Industrial production has already decreased to its lowest level in two decades and export figures for May were devastating, highlighting Germany's heavy dependence on fellow European and overseas markets. German shipments abroad would dip by 14.5% this year, the pundits predicted.

The five economic advisers said unemployment was likely to rise further in the months ahead to an annual average of 2.72 million in 2020, up from 2.27 million last year.

According to the Kiel Institute for the World Economy (IfW), pandemic-related losses for the German economy will add up to some €390 billion ($440 billion) for this year and next.

"We're heading into a deep recession," said economic adviser Veronika Grimm, adding that calculating the aggregate decrease in GDP was difficult as it was unclear as yet whether the country would be hit by a second wave of infections triggering renewed lockdowns.

V-shaped recovery possible

The economic pundits warned that a full recovery from the current blow would take a long time reaching into 2022, considering in particular that some of Germany's crucial export markets had been hit even harder by the pandemic.

They noted that companies would remain reluctant to risk big investments for quite some time to come as long as exports were down and the firms' equity capital was low.

All in all, though, the advisers were confident that Germany could embark on a recovery trajectory in the summer months and return to a solid growth path as of next year despite all the uncertainty at hand. They penciled in a 4.5% expansion of the economy for 2021.

The advisers expected a boost from a state-initiated economic aid package to the tune of €130 billion that includes a shot in the arm for struggling communities and bonuses for buyers of new all-electric and hybrid vehicles.

hg/ap (dpa, Reuters)