Macroeconomics

The COVID cycle and vaccination progress will drive the economy in 2021. We expect that infection rates will not come down decisively before Q2. By summer vaccination numbers should reach critical mass. A strong recovery starting in Q2 should yield an annual GDP increase of 4.5% after a 5.5% drop in 2020.
All attention on the super election year 2021: Germany is facing federal elections and multiple state elections. Our baseline scenario is a conservative-green government, but coalition talks will significantly test the willingness to compromise on both sides.
(Also in this issue: global trade and exports, private consumption, labour market, equipment and other investment, the German housing market, public finances, inflation, German industry's corona losses) [more]

There’s no denying that the federal budget is increasingly in trouble. It may have been the right decision, and an important one at that, to loosen the shackles on the financial assistance and add supplementary aid schemes, but it must be ensured that things don’t get out of hand. If it keeps a lid on the likely pressure to consolidate, the government will need to pull out all the stops to preserve its fiscal resources by making more efficient use of them as the crisis progresses. The new federal government will face major challenges and weighty decisions in fiscal and economic policy. After all, it will ultimately have to manage putting the public finances back on solid ground without overly squeezing the economy with even more burdensome taxes and contributions. There is probably no way around a major reckoning next autumn after the Bundestag parliamentary elections. [more]

Mankind has survived all kinds of pandemics, even the plague. However, humans are ill-equipped when confronted with an invisible danger. Moreover, the COVID-19 pandemic has four important features which almost certainly overstretch the human analytical capacity: Time-lags, external effects, nonlinearities and complexity. We cannot escape our biases when deliberating COVID-19 . But being aware of them might yield more cautious and less apodictic views. Our evolutionary success can be traced to the fact that we became “social animals” with these biases often enhancing a smooth cooperation. Now it is on the society and its institutions to make sure that they do not cause people turning against society. [more]

Early this year, the government had to put together massive bailout and aid packages in next to no time in order to avert an imminent economic collapse. However, cash outflow from immediate assistance and interim aid schemes have so far fallen considerably short of the expectations. As a result, the funds budgeted for this purpose have not been nearly utilised to their full extent. In light of November’s partial lockdown, the government has now decided to increase the dose of its financial aid to solo self-employed, freelancers as well as small and medium-sized companies. Consequently, the mere ripple of support often bemoaned in this area could ultimately gather enough strength yet to become a mighty wave. The provision of aid over the further course of the crisis is to be strictly guided by necessity, effectiveness and appropriateness as fiscal resources are limited and the state cannot provide unlimited comprehensive cover. [more]

Q3 GDP surprise: A rear mirror view – but obstacles right in front. With the partial lockdown during November, the economy will almost certainly see another negative quarter, even in an optimistic scenario where restrictions succeed in squashing new infections and will be completely abolished by the end of November. Prepare the German healthcare sector for regional bottlenecks – protect risk groups better: The number of patients in intensive care and hospital capacity is just as important as the number of new infections. We estimate that 400,000 acutely infected patients are the limit for intensive care units. (Also in this issue: inflation outlook, German labour market, corporate insolvencies, German auto industry, global construction industry, German corona policy, open borders in the EU) [more]

After the summer break new cases have picked up strongly in most of Germany’s neighboring countries. In many cases (France, Spain, UK, Netherlands, Poland, Czech Republic), numbers are (by far) exceeding the peaks reported in spring or are back at these levels (Belgium, Austria). Various governments have introduced new measures, such as Paris shutting down parts of the hospitality and leisure sector, and Spain ordering a partial lockdown in Madrid, albeit not as encompassing as in April. In other countries, social distancing and mask-wearing rules have been tightened or are being discussed. [more]

The sizeable fiscal gaps in 2020/21 caused by the corona pandemic – which, just at the federal government level, are reflected in record new borrowing of around EUR 218 bn and EUR 96 bn, respectively – are a harsh setback for ensuring long-term public debt sustainability. In this week’s debate on the federal budget Finance Minister Scholz assured that no fiscal action in response to the crisis would be more expensive than fiscal action. But for the next federal government this appraisal might also hold true – but then with respect to fiscal consolidation. [more]

We have lifted our GDP forecast for 2020 to -5.5% and see the economy expanding by 4.5% in 2021. An important factor is that the rebound during Q2 – when GDP contracted by 9.7% – turned out more dynamic than expected. The momentum carried over into July. Even with some likely short-term moderation in August, we now expect Q3 GDP to increase by 6.0% qoq. Together with a 2.5% expansion in Q4, this should result in an annual GDP drop of “only” 5.5%, compared to the 9% expected in early May at the height of the pandemic in Europe. The higher carry-over lifts our 2021 GDP growth forecast to 4.5%, despite somewhat weaker momentum in H1 than expected earlier. (Also in this issue: labour market, bilateral exports, fiscal outlook 2020-22, German industry, the race for CDU leadership, and federal election prospects.) [more]

The corona crisis has forced many employees to work from home. A consensus seems to be emerging that this is becoming the new normal. Many companies have already offered their employees the option to work from home for several days per week, even post-COVID. An enforceable right for employees to work from home would imply that employers must compensate employees for the additional living space required for home offices. In this paper we analyse the long-term implications of such legislation. We find serious side effects, in particular for the real estate market and the labour market. [more]

Monthly data point to a strong pickup in economic momentum during the course of Q2, in part due to catch-up effects. Still, after the unprecedented 10.1% GDP contraction in Q2 we expect a 5% increase in Q3 followed by a 2% rise in Q4 (consensus: 5.2% and 2.4%). We now expect German GDP to contract by 6.4% (compared with -9% predicted in early May) followed by a 4% increase in 2021. Still, the pre-COVID output level will not be reached before mid-2022. The current exceptional volatility in monthly data and the further development of the global pandemic imply that the error margins remain exceptionally high. (Also in this issue: Merkel’s strength might become a burden for her potential successors.) [more]