Europe’s biggest German economy to shrink by nearly 10% in Q2, say experts

Gross domestic product likely contracted by 1.9 percent in the first three months of 2020, and is set to shrink by a whopping 9.8 percent year-on-year in the second quarter as companies feel the pain from widespread shutdowns.

Over the full year, Germany's economy is predicted to contract by 4.2 percent. (Reuters image)
Over the full year, Germany's economy is predicted to contract by 4.2 percent. (Reuters image)

The German economy, Europe’s biggest, is expected to shrink by nearly 10 percent in the second quarter as the coronavirus paralyses the country, leading research institutes warned Wednesday.

“The corona pandemic will trigger a serious recession in Germany,” the six think tanks including Ifo, DIW and RWI said in their annual spring report.

Gross domestic product likely contracted by 1.9 percent in the first three months of 2020, and is set to shrink by a whopping 9.8 percent year-on-year in the second quarter as companies feel the pain from widespread shutdowns.

The second-quarter plunge is twice as big as seen during the 2008-2009 financial crisis and marks the steepest fall since the institutes’ records began in 1970, the report noted.

Over the full year, Germany’s economy is predicted to contract by 4.2 percent.

Their forecast is in line with German Economy Minister Peter Altmaier’s recent assessment that the economy would contract by around five percent in 2020.

Germany’s “Wise Men” council of economic experts last week issued a similar forecast, predicting a drop in GDP of between 2.8 and 5.4 percent this year.

“After 10 years of growth we will experience a recession this year,” Altmaier said in response to Tuesday’s report.

He warned that the pace of the economic recovery would depend on when the measures to restrict people’s movements “for the protection of lives and health” can be scaled back.

Like countries around the world, the German government has taken drastic steps to stem the spread of the virus, keeping millions of people at home, closing schools and shops and shutting down factories

Berlin has unveiled an eye-watering 1.1 trillion euro rescue package to cushion the blow for companies and employees, even suspending a constitutional balanced-budget rule to ramp up its response.

The package includes state guarantees for loans to businesses, easier access to benefits for workers placed on reduced hours, and direct support for the hardest-hit firms.

But even with the unprecedented measures, the six institutes warned that the recession “would leave its mark” on the job market.

Germany has long enjoyed record-low unemployment of around five percent, and German workers with their relatively high wages have for years been a key driver of the country’s growth via domestic consumption.

Unemployment could climb to 5.9 percent report this year, the institutes said.

The number of workers on shorter hours meanwhile is expected to hit 2.4 million, as giants like Lufthansa, Volkswagen, BMW and Puma join a slew of companies taking up a government scheme that tops up the pay of affected employees.

Looking ahead, the institutes said Germany with its bulging state coffers was “well positioned” to cope with the economic slump and should bounce back in “the medium term”.

For 2021, the institutes expect Germany to notch up growth of 5.8 percent.

The German government will unveil its official projections for the economy on April 29.

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