German economy probably shrank 1.8% last quarter due to COVID lockdown, institutes say

BERLIN (Reuters) -The German economy probably shrank by 1.8% in the first quarter because of COVID-19 restrictions, leading economic institutes said on Thursday as they revised their joint growth forecast for Europe’s largest economy.

FILE PHOTO: Dark clouds hang over the financial district as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, March 16, 2021. REUTERS/Kai Pfaffenbach/File Photo

The revisions are the latest sign tat the economy will need longer than initially thought to reach its pre-crisis level. A more contagious virus variant and a slow vaccine introduction are complicating efforts to contain a third wave of infections.

The institutes now expect gross domestic product to grow by 3.7% this year, down from their previous forecast of 4.7%. But the institutes raised their GDP estimate for 2022 to 3.9% from 2.7%, expecting household spending to rebound once coronavirus restrictions are lifted again.

The institutes estimate that COVID-19 restrictions have led households to save some 200 billion euros ($239.54 billion), Torsten Schmidt from the RWI institute said. That money is likely to boost overall economic growth once curbs are lifted, enabling consumers to start spending again during the summer.

The biggest downside risks to the joint forecast are further delays in vaccine deliveries and possible new virus mutations for which existing vaccines would only offer limited or no immunisation, the institutes warned.

The institutes’ GDP estimates form the basis for the government’s own economic growth forecast, which will be updated later this month.

In January, the government said it expected GDP to grow 3% this year, following a drop of 4.9% in the previous year caused by the coronavirus.

Export-oriented manufacturers are currently benefiting from higher demand from China and the United States, but domestically focussed services are suffering under extended restrictions to contain a third wave of COVID-19 infections.

The institutes said they expected current measures to be tightened again in the coming weeks before authorities ease them from mid-May. All restrictions are likely to be lifted during the third quarter, they said.

“In the course of the easing, we expect a strong expansion of economic activity for the summer half of the year, especially in the service sector, which was particularly affected by the pandemic,” RWI’s Schmidt said.

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