The engine of the world economy stutters

The weakness of the American economy is also holding back the recovery of other economies. A quick catch-up process is therefore not in sight in Germany.

The German economy depends on world trade: a container ship in the port of Hamburg

Mith the announcement that US economic output could shrink by up to 30 percent in the current quarter – extrapolated to 2020 as a whole – the director of the US Federal Reserve, Jerome Powell, caused a sensation. It’s not the first time that growth figures from the United States have created confusion. This is due to the method of calculation. In the United States, it is common practice for quarterly figures to be projected to “annualized” values. In fact, the Fed expects gross domestic product (GDP) to decline by “only” around 7.5 percent in the second quarter of 2020.

“The Fed’s forecast is in line with our expectations. That is a strong decline, albeit not as strong as we expect for Germany and Europe, ”comments Torsten Schmidt, Head of the Competence Area“ Growth, Business Cycle, Public Finances ”at the Leibniz Institute for Economic Research (RWI) in Essen. Most economists expect Germany’s GDP to decline by more than 10 percent.

How quickly the German economy comes out of this deep valley of the crisis depends not only on the speed at which the lockdown is opened, but also largely on the recovery of important sales markets, says Stefan Kooths, head of the forecast center at the Kiel Institute for the World Economy (IfW) . Trade with the United States is a crucial channel. America is Germany’s most important export customer. Last year, German companies exported goods worth 119 billion euros to the world’s largest economy – 9 percent of total exports.

Bundesbank expects the German economy to recover slowly

The IfW is forecasting a 12 percent drop in American economic output in the second quarter and anticipates a recovery of 5.4 percent in the third quarter. RWI economist Schmidt, on the other hand, is worried about the still high number of infections and rising unemployment in America. He considers a strong upward movement in the third quarter to be increasingly unlikely. “That delays the recovery of world trade and slows down the catching-up process of other countries,” says Schmidt. Due to its strong dependence on world trade and its exposed position in the export of capital goods, this also affects the German economy. It will take at least the middle of next year until it reaches its pre-crisis level again, says Kooths from the IfW.

The Bundesbank also expects a slow recovery in the German economy: “Despite the easing measures that have been introduced, social and economic life in Germany is still very far from a state that was previously considered normal. The available economic indicators paint a correspondingly gloomy picture, ”writes the central bank in its May monthly report published on Monday. “The German economy remains firmly in the grip of the coronavirus pandemic in the second quarter. The economic output is likely to turn out to be considerably lower than the average of the already depressed first quarter ”, it continues.

With a view to the increasing demands for a state economic stimulus program, the Bundesbank is of the opinion: “Given the good starting position, financial policy should still have enough leeway for a possibly strong temporary impulse.” According to the Bundesbank economists, a possible economic stimulus program should be “targeted and, above all, limited in time.”