German Economy Seen Shrinking 10% This Quarter Due to Virus

USA World

(Bloomberg) —

Germany’s economy will shrink this quarter at more than twice the pace recorded at the height of the financial crisis, adding to evidence of the heft of the blow to European economies due to the pandemic.

Output is predicted to slump 9.8% in the April-June period, the most since records for quarterly data began in 1970. German gross domestic product on course for a 4.2% contraction this year, according to the country’s leading research institutes.

Their forecasts come as data painted an equally bleak outlook elsewhere in Europe, where measures to limit the spread of the coronavirus outbreak have shuttered businesses. The French economy shrank the most since World War II at the start of this year, and the nation’s central bank said prospects for the rest of 2020 are souring significantly.

While the region’s governments have pledged hundreds of billions of euros to support their economies, they’ve failed so far to come up with a joint response. Finance ministers couldn’t agree on a 500 billion-euro ($543 billion) package last night, prolonging a paralysis that casts doubt over the bloc’s ability to weather the crisis.

“The recession will have a profound impact on the labor market and public finances,” Timo Wollmershaeuser, head of business-cycle analysis and forecasts at the Ifo institute, said about the pandemic’s impact on Germany. Unemployment in Europe’s largest economy will likely rise to 5.9% this year, he added.

Yet the institutes cautioned that there are “considerable downside risks” to their projections, including a slower than expected weakening in the spread of the virus, problems with reviving the economy after the shutdown eases or a new wave of infections.

The twice-yearly forecasts, which form the basis of the government’s economic outlook, are prepared by the German Institute for Economic Research in Berlin, the Halle Institute for Economic Research, the Ifo Institute in Munich, the Kiel Institute for the World Economy and the RWI-Leibniz Institute for Economic Research in Essen.

Chancellor Angela Merkel’s government has moved swiftly to mitigate the effects of the virus on Europe’s biggest economy, and on Monday announced a new “limitless” loan program for Germany’s small- and medium-sized companies, which form the backbone of the economy. That’s on top of a slew of other measures to counter what Merkel has called Germany’s biggest challenge since World War II.

Thanks to fiscal aid, the economists expect an economic expansion of 5.8% in 2021.

The number of new coronavirus infections in Germany rose the most in three days, according to data Wednesday from Johns Hopkins University, bringing the total to 107,663 in Europe’s fourth-most extensive outbreak. The number of fatalities climbed to 2,016.

(Updates with Bank of France outlook in third paragraph.)

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