German economic recovery looks slower than expected

Germany's economy could recover more slowly from the effects of the Covid-19 pandemic than expected, a group of five research institutes has said.

The economic recovery has lost momentum and the effects of the pandemic are "more persistent than assumed in spring", the German Institute for Economic Research, the IFO Institute, the Kiel Institute for the World Economy (IfW), the Halle Institute for Economic Research and RWI Essen have said.

The institutes expect Germany's gross domestic product (GDP) to fall by 5.4pc this year, deeper than the 4.2pc decrease forecast in spring. And the 4.7pc rise expected next year is down from the 5.8pc gain previously estimated. This would leave GDP at the end of next year still 2.5pc "below the level that would have prevailed without the pandemic", the institutes said. A full recovery is only expected by the end of 2022, they said.

While much of the drop in output during the heaviest restrictions in spring has been recovered, "the remaining catch-up process is the more difficult part of the return to normality", IfW head of forecasting Stefan Kooths said. And "the recovery is being held back by those sectors that are particularly dependent on social contacts, such as restaurants and tourism, the event business and air traffic", the institutes said.

These sectors have experienced renewed setbacks, with more widespread containment measures reintroduced in response to rising infection rates. Measures include curfews for bars and restaurants in some areas, such as Berlin, stricter limits on the number of people allowed at private events and restrictions for hotels over accommodating tourists from "risk areas" within Germany and elsewhere. The number of infections in Germany has risen sharply in recent weeks, although per capita infections have remained lower than in many other European countries.

For their forecasts, "the institutes assume that starting in spring next year, disease control measures can be rolled back to such an extent that they no longer have a significant impact on economic activity by autumn". But "the unclear extent of corporate insolvencies in Germany and abroad" provide uncertainty, while "various trade conflicts remain a source of concern", they said.

A slower-than-anticipated economic recovery could curb German gas demand. While German industrial gas demand rose on the year in recent months, this was probably the result of strong power sector gas consumption. And with German gas-fired generation this month on track to fall from a year earlier for the first time since May, industrial output has slipped. Aggregate industrial consumption decreased to 1.54 TWh/d on 1-12 October — the latest available data — from 1.63 TWh/d over the whole of October last year.

By Stefan Krümpelmann