Germany’s economy will shrink 6 per cent this year, the country’s central bank has forecast — faring better than other big European countries thanks partly to Berlin’s latest €130bn stimulus package.
The Bundesbank published new scenarios for the German economy on Friday, including an estimate of how much faster the recovery would be because of the round of tax cuts and extra spending that the government announced this week.
In its baseline scenario, Europe’s largest economy is set to contract 7.1 per cent this year, before rebounding 3.2 per cent next year — based on an assumption that “an effective medical solution” to the pandemic is found by then — and by 3.8 per cent in 2022.
Included in those figures is the effect of the government stimulus package, which would add an extra percentage point to German GDP this year and a further half a percentage point next year, the Bundesbank said.
“Government finances are making a substantial contribution to stabilisation,” said Jens Weidmann, Bundesbank president. “Further stimulus is also appropriate in light of the current situation, and I welcome the economic stimulus package.”
Announcing the package this week, Olaf Scholz, Germany’s finance minister, said the government aimed to bring the country out of the crisis “with a ka-boom”. It includes a cut in value added tax on purchases for the rest of this year and a €300 payment per child.
The €20bn cut in VAT would reduce inflation to close to zero this year, the Bundesbank said on Friday — down from the central bank’s initial forecast of 0.8 per cent.
Its forecasts came a day after the European Central Bank’s decision to expand and extend its emergency bond-buying programme by more than expected, and just over a week after the EU proposed to create a €750bn rescue fund to support countries hit hardest by coronavirus.
Analysts said Europe’s policymakers were at last producing a sufficiently robust response to tackle the worst economic crisis for a generation.
“Europe is starting to get its act together with a credible policy mix emerging across both fiscal and monetary for the first time since the virus shock began,” said Krishna Guha, vice-president of Evercore-ISI.
The ECB forecast on Thursday the eurozone economy would decline 8.7 per cent this year.
Philip Lane, ECB chief economist, wrote in a blog on Friday: “The downward revisions to the outlook for economic activity would be far more severe in the absence of the significant fiscal response to the pandemic shock and the stabilising impact of the monetary policy and financial supervisory actions that have been taken.”
German factory orders plunged 25.8 per cent in April, the largest-ever monthly decline and almost double the previous record set only the month before, according to separate data published on Friday that underlined the heavy impact the crisis has had on Europe’s industrial heartland. In Spain, industrial production excluding construction fell a record 22 per cent in April.
Germany’s economy contracted 2.2 per cent in the first quarter and the Bundesbank said it expected “another and overall even greater decline in the second quarter, although the economy had already bottomed out in April and is starting to grow again”.
It added that the recovery would “remain subdued to begin with, as the negative effects caused by the pandemic and the measures taken to combat it will likely diminish only gradually”.
“The severe hit to business revenues during the massive recession will have lasting economic effects,” warned Kallum Pickering, senior economist at Berenberg. “Even as the recovery gains momentum, the economic shock will remain highly visible in job losses and defaults.”
Source: Economy - ft.com
