Will inflation hurt the economy in 2020?

Press

Corona epidemic weakens German economy

Press release from March 19, 2020

Due to the effects of the corona epidemic, the RWI is lowering its forecast for German economic growth in 2020 by almost two percentage points to -0.8 percent; for 2021 it expects 2.3 instead of 1.5 percent due to catch-up effects. The unemployment rate is likely to remain stable at 5 percent each in 2020 and 2021 despite the slump in production. Even without taking into account the extensive aid programs, public budgets are likely to show a minus of 7 billion euros in the coming year. Overall, the corona epidemic is temporarily causing a sharp decline in production for the German economy and the global economy.

The main results:

  • Due to the effects of the Corona / COVID-19 epidemic, the RWI is lowering its Forecast of German economic growth for 2020 compared to December last year by almost two percentage points from 1.1 to -0.8 percent. For 2021 it expects 2.3 instead of 1.5 percent due to catch-up effects.
  • The prognosis is based on the assumption that the production due to the economic restrictions as a result of the COVID-19 epidemic only decline sharply in the first half of this year becomes. As a result of the epidemic and the countermeasures taken, GDP growth is likely to be 2 percentage points lower than would otherwise have been expected. It is assumed that the ones that have been taken in the meantime activities the spread of COVID-19 actually slow it down and it will be available in the second half of 2020 and in the coming year due to Catch-up effects there will be a significant expansion in gross domestic product (GDP).
  • The labour market is robust. Due to the easing of the regulations on short-time work and the liquidity support for companies, employment should remain stable in the forecast period despite COVID-19. In 2020 and 2021, the unemployment rate is likely to be 5 percent each.
  • The inflation is likely to decline significantly in 2020 and 2021 and will be 0.7 percent this year and 1.3 percent the next, mainly due to lower energy prices. In addition, inflation in the domestic economy is likely to remain weak due to the weak economic momentum. Core inflation (prices excluding energy) is likely to be 1.4 percent in both years.
  • The state budget surplus should be negative again at the latest in the coming year. In the current year it is expected to be around 10 billion euros and in 2021 it will again reach a deficit of -7 billion euros for the first time. Even without the federal government's aid program, there were signs of an accelerated reduction in the budget surplus in 2020 and 2021. In relation to GDP, this means a decrease in the budget balance from 0.3 to around -0.2 percent over the same period. The structural primary balance, which has fallen over the forecast period, indicates an expansionary financial policy. The debt-to-GDP ratio fell below 60 percent of GDP in 2019 and is expected to fall further to just under 56 percent by 2021. Government revenues develop parallel to GDP with a share of approx. 46 percent.
  • The World economyis likely to slow down significantly this year due to the effects of the corona epidemic. In the first half of 2020, macroeconomic activity is likely to decline sharply. Overall, world production is likely to increase by 0.8 percent this year. In the coming year it should increase by 3.1 percent. The central assumption of this forecast is that COVID-19 will be contained.

To the economic impact of the corona epidemic says RWI economic expert Torsten Schmidt: “The corona epidemic will lead to a sharp decline in production in Germany in the short term. Not only for health reasons we should try everything to successfully prevent a major outbreak, it could also save us from great economic damage. "

(published in "RWI Economic Reports", Issue 1/2020)

Your contact person for this:
Prof. Dr. Torsten Schmidt Tel. (0201) 81 49-287
Sabine Weiler (press office) Tel. (0201) 81 49-213