What is driving the German economy?

IW economic forecast The pre-crisis level will be reached at the end of 2021

After the German economy slumped in the second quarter of 2020, it recovered strongly in the third quarter. But the second corona wave slowed the economy down again. The increased uncertainty is again dampening consumption and investment, although the borders are open and the supply chains are stable. Of course, the lockdown puts a particular strain on tourism, the hospitality industry and culture. Overall, the IW economic experts anticipate a decline in German gross domestic product of 5¼ percent for 2020.

The economy will pick up speed from spring 2021

The new year begins without any improvement, the German economy continues to shrink in the first quarter of 2021. There could be a shortage of workers in the construction industry, and the international infection situation is slowing down exports. The increase in VAT to its previous level of 19 percent will have a negative effect on consumption from January. From spring on, the economy will finally pick up speed again. The vaccinations, which are expected to have the first positive effects on the health system and economic life from the second quarter of 2021, also give hope to Germany's trading partners. Overall, the IW forecast assumes that the German economy will grow by four percent in 2021. "If the vaccination starts well and the number of infections drops, people become more confident and consume and invest more," says IW Director Michael Hüther. "If the development continues successfully, the German economy will return to its pre-crisis level by the end of next year."

The results of the IW economic forecast in detail:

  • The World economy will increase by 4½ percent in 2021 - provided that vaccinations start globally and are successful. The recovery of the global economy is stimulating foreign trade: German exports will grow by seven percent in 2021, but cannot make up for the decline of eleven percent from 2020.
  • The Private consumption will increase by almost four percent in 2021. On the one hand, the increase in sales tax is clouding. On the other hand, income tax payers can look forward to significantly more net than gross in the coming year. In addition, a lot of money was put into savings accounts during the crisis, which will be spent more in 2021. Inflation remains low.
  • Companies typically invest less in times of crisis - they shrink accordingly Equipment investment 2020 by 14 percent. In spring, however, recovery is in sight here too, provided the global economy stabilizes and companies receive loans. Investments increase by seven percent. Both Construction investment the pace is slowing - but they will grow in both 2020 and 2021.
  • The labour market only recovered moderately. The companies hardly hire new employees, but instead are increasing the working hours of their workforce and reducing short-time work. Overall, unemployment will remain at a good 2.7 million in 2021, the rate will remain at just under six percent.
  • The public budgets will remain in the red in 2021. The pandemic is driving up spending and depressing revenue. The national deficit in 2021 will be down by 4¼ percent, but two points lower than in the crisis year 2020.