KfW Business Cycle Compass Germany: Coronavirus outbreak delays economic recovery

• Little more than stagnation in first half year
• KfW Research lowers GDP growth forecast for 2020 to 0.8% (previous forecast: +0.9%), initial estimate for 2021 is 1.3%
• Downward risks predominate

The German economy has lost pace as a result of difficult global conditions. Gross domestic product (GDP) stagnated in the final quarter, and growth for all of 2019 was a meagre 0.6%. That was the lowest growth rate since the euro crisis in 2012 and 2013, caused by very weak export growth and the associated industrial recession which has now lasted for six consecutive quarters, the longest since unification.

While trade tensions and a weak global economy are weighing on industry and international trade, domestic demand is proving to be resilient and bolstering growth. In the short term, a change to this split economic development is not in sight. The stagnation can be expected to continue in the first half of the year as a result of the SARS-CoV-2 outbreak in China. A noticeable increase in quarterly growth rates is unlikely before summer. KfW Research therefore expects GDP to grow by only 0.8% in all of 2020 (previous forecast: +0.9%). In its initial forecast for 2021, KfW Research predicts a 1.3% increase in growth.

KfW Research bases its forecast on the assumption that the coronavirus epidemic will remain mostly confined to China and will abate in several weeks. After that, the Chinese economy should return to normal relatively quickly before any massive disruptions occur in global value chains. The downward risks of the novel virus are substantial, however. “Should the SARS-CoV-2 epidemic continue for longer and impact other regions of the world more heavily, it would raise the likelihood of serious consequences for international trade and value chains, to which German industry is particularly exposed. This is why I am concerned about the situation in Italy”, warned Dr Fritzi Köhler-Geib, Chief Economist of KfW.

It must be kept in mind that the GDP growth of 0.8% predicted by KfW Research for all of 2020 is supported by an unusually strong calendar effect. As significantly more holidays will fall on a weekend in 2020, the year has four more working days than 2019. The additional value added will contribute 0.4 percentage points total annual growth. Adjusted for calendar effects, that is, driven purely by economic activity, GDP in 2020 will therefore grow by just 0.4%, an even weaker pace than last year, for which the calendar effect was negligible.

With a view to 2021, however, Köhler-Geib sees good reason for an economic recovery. “Global economic growth should be slightly higher again next year, giving our exports new impetus. German industry should then grow a bit more strongly again, as it will benefit from more favourable international demand. That will stimulate business investment. At the same time, the partial elimination of the solidarity surcharge from 2021 will strengthen consumers’ purchasing power”. As consumption and private residential construction will presumably continue to grow, KfW Research predicts GDP growth of 1.3% in its initial forecast for 2021. Next year will have the same number of working days as 2020. Thus, the forecast for 2021 is also for calendar-adjusted GDP growth of 1.3%, thus representing a noticeable economic revival compared with the very modest calendar-adjusted growth of this year.

The coronavirus epidemic is probably the largest economic risk at this time, but not the only one. The trade risks have eased but not vanished. After the UK’s exit from the EU, the future relations must now be successfully negotiated by the end of 2020. Otherwise, tariffs and quotas would hamper trade between the EU and the UK from 2021 onwards. Furthermore, Germany could still be hit by US special tariffs on European cars and car parts.

The current KfW Business Cycle Compass is available at www.kfw.de/konjunkturkompass