German economy to contract 7% despite stimulus

The German economy has passed the trough of its coronavirus recession and is starting to grow again, the Bundesbank said, endorsing the government’s sweeping fiscal stimulus that should underpin the rebound.

Yet the recovery is still muted as some restrictions to rein in the spread of the pandemic remain in place, the institution cautioned in its twice-annual economic projections. Output this year is forecast to shrink 7.1 percent, before bouncing back in the subsequent two years.

To help the economy come back to life, Chancellor Angela Merkel this week unveiled a €130 billion ($148bn) plan focused on fuelling consumption and infrastructure investment, taking total spending to more than €1.3 trillion, by far the most in the European Union.

“Public finances are making a significant contribution to stabilizing the economy,” Bundesbank president Jens Weidmann said in a statement. “Additional stimulus is appropriate in the current situation and I welcome the package.”

The Bundesbank’s latest projections don’t factor in the impact of the latest dose of fiscal aid, but the institution estimates it could boost GDP by more than 1 percentage point this year.

The European Central Bank also added some support on Thursday with another €600bn in asset purchases that will stretch to the middle of next year. Despite those efforts, it sees the 19-nation euro economy shrinking 8.7 percent in 2020.

In April, German factories experienced a record decline in demand, underscoring the brutal hit Europe’s largest economy sustained from the shuttering of businesses to rein in the pandemic. Producers of investment goods suffered particularly, with orders plummeting more than 30 percent.

The Bundesbank cautioned that the economic situation remains highly uncertain and presented two alternative scenarios for how the outlook could develop. Under the negative one, which assumes infections will flare up again, the economy could contract by as much as 10 percent.

More than 600,000 people have already lost their jobs, and the Ifo institute estimates that some 7 million more are on temporary state-wage support. While the Bundesbank sees unemployment rising, it doesn’t expect any large-scale damage to the labor market.