The German economy: muddling through during Corona

Germany’s economic output contracted by 5.0 percent in 2020, according to the Federal Statistical Office. Although the decline in economic output was smaller than in other major European countries, the Covid-19 pandemic and the measures taken to contain it also led to a dramatic drop in private consumption and business investment in Germany. In early summer, the pandemic was contained for the time being; subsequently, the various lockdown measures were eased. In the wake of this, the economy picked up significantly in the summer. However, the recovery was slowed by a rise in Covid-19 case numbers in the fall and renewed restrictions on economic activity. At the beginning of 2021, containment measures were tightened once again. As a result, GDP is expected to decline in the first quarter of 2021. Uncertainties about the further course of the pandemic remain and are dampening economic momentum. For 2021 as a whole, I currently expect only a rather moderate growth rate of 3.5 to 4 percent.

Both household consumption (minus 13.6 percent) and business investment (minus 15.9 percent) considerably decreased in the second quarter. Export volumes decreased by 18.9 percent and import volumes declined 23.1 percent. In the summer, I was relatively optimistic as regards the short-term recovery, but relatively pessimistic as to economic developments next year (I also hold this view for several other countries).

The pandemic is obviously still a drag on the economy, although the situation is currently less severe than in many other advanced economies. I expect that economic growth in the fourth quarter will be modest. The situation on the labor market has improved since May, but remains bad. The unemployment rate in November was at 8.5 percent (compared to 5.6 percent in February before the lockdown).

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