German economists warn of dramatic 9-per-cent contraction in GDP

German economists are warning of a dramatic contraction in Europe’s biggest economy of up to 9 per cent as the corona crisis drives the nation into its first recession since the global financial crisis in 2008.

As a series of unprecedented events unfold, analysts are scrambling to draw up forecasts for the virus’ economic impact.

“There is no historical experience of comparable events from which probable courses of the crisis could be determined”, said Timo Wollmershaeuser, senior economist at the Munich-based Ifo institute.

The Ifo on Thursday presented two possible scenarios for this year. The first foresees the German economy shrinking by 6 per cent as the national lockdown hits both industry and the service sector.

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A second more favourable scenario sees current restrictions on industry having less of an economic impact. In that case, Europe’s powerhouse economy contracts by 1.5 per cent in 2020, Ifo says.

But alternative forecasts unveiled on Thursday by the Kiel Institute for the World Economy (Ifw) paint an even more dramatic picture of the economic pain Germany may endure this year.

The Ifw says the economy could contract by up to 9 per cent, depending on the length of time it takes to stem the spread of the deadly virus and restore economic confidence. 

Several of the world’s major banks believe that the global economy has already lurched into a recession.

The Ifo’s updated economic growth forecasts coincided with the release of the institute’s closely-watched monthly business climate survey, which in March posted its steepest fall since 1991 and lowest reading since the onset of the global financial crisis more than a decade ago.

After the German economy started the new year on a relatively optimistic note, the Ifw economists now see the nation’s gross domestic product (GDP) slumping by 4.5 per cent this year if the current crisis continues only until the end of April. 

Germany’s Deutsche Bank also says the coronavirus recession will result in a contraction in GDP of between 4 and 5 per cent in 2020, despite expectations of a recovery in the second half of the year.

But the Ifw believes that if a rebound in German economic life fails to materialize by August, the nation’s GDP would contract by a hefty 8.7 per cent this year.

Just a week ago, the forecasts looked very different, with the Ifw foreseeing the German economy shrinking by a relatively mild 0.1 per cent, highlighting a rapid turnaround in economic sentiment as the virus spreads around the world.

In March alone, the Ifw says economic output plummeted by a staggering 18 per cent compared to February.

Wednesday’s new growth forecasts from the Berlin-based German Institute for Economic Research (DIW) struck a more cautious tone.

Abandoning its previous projection of an annual GDP expansion of 1.2 per cent, DIW is now warning GDP will contract by at least 0.1 per cent in 2020.

But however deep this year’s recession turns out to be, the Ifw sees – as is the case with other economic forecasters – a remarkable upswing taking hold in 2021.

The Kiel economists see German GDP racing ahead next year by between 7.2 per cent to 10.9 per cent.

“The slump in stock markets and the scaling back of production is occurring much more rapidly than during the great recession of 2008/2009, which was triggered by the global financial crisis”  says IfW chief forecaster Stefan Kooths.

However, “the chances of pulling out of the production slump more quickly are also good,” he adds. (dpa)