German Government Raises Growth Forecast for 2021 to 3.5%

The German government has raised its growth outlook for this year to 3.5%, according to a person familiar with the decision, bringing a more cautious previous prediction of 3% in line with most other forecasters.

Expansion is expected to accelerate slightly next year to 3.6%, said the person, who asked not to be identified discussing confidential information. Economy Minister Peter Altmaier is due to present the latest forecasts at a news conference on Tuesday in Berlin.

While Europe’s largest economy has weathered the coronavirus crisis better than many developed nations, the government doesn’t expect a return to pre-pandemic levels until around the middle of next year. With most of the country still in partial lockdown, the services sector continues to suffer while manufacturing has been relatively robust.

Overall, the situation remains fragile. Businesses unexpectedly became more pessimistic about the outlook this month as officials continue to battle a stubbornly high rate of Covid-19 infections and supply-chain constraints weigh on the recovery.

German Government Raises Growth Forecast for 2021 to 3.5%

The Ifo institute’s gauge of expectations for the next six months fell to 99.5 in April from 100.3. Economists surveyed by Bloomberg had predicted a gain. At the same time, an assessment of current conditions improved.

“The Ifo release once again paints a picture of a split economy firing mostly on one cylinder, namely manufacturing,” Stefan Schilbe, chief economist for Germany at HSBC, said in a note.

Nighttime Curfews

While Germany has significantly accelerated its vaccination campaign, the infection rate remains high and businesses are facing severe curbs on activity. Nighttime curfews have been in place since Saturday across most of the country, and many shops were forced to close after the government tightened restrictions.

Because of the curbs, the economy is expected to have shrunk by 1.5% in the first three months of the year, according to a Bloomberg survey of economists. The Federal Statistics Office is due to publish a first estimate of first-quarter gross domestic product on Friday.

Some 45% of companies in the German manufacturing sector also reported supply-chain shortages, the highest value in three decades, Ifo said. Issues relate to the sourcing of semiconductors as well as other intermediate products.

German Government Raises Growth Forecast for 2021 to 3.5%

“We have a serious problem here,” Ifo President Clemens Fuest said on Bloomberg Radio. “This is something that is very likely to hold back the recovery in manufacturing.”

Volkswagen AG has told managers that the global chip shortage will cause a bigger hit to second-quarter production compared with the previous three months, the Financial Times reported Saturday.

Surveys of purchasing managers on Friday suggested that the wider euro area is turning the page on the pandemic, after on-and-off lockdowns dragged it into a double-dip recession.

Services Recovery

Services grew in April for the first time in eight months, a milestone for a sector that has been hamstrung by some of the worst restrictions since the outbreak. There was a slight loss of momentum in German manufacturing amid the supply shortages and a lack of freight capacity.

The recovery is expected to gain momentum in the second half of the year as vaccinations proceed, lockdowns ease and the European Union’s 800 billion-euro ($966 billion) recovery fund is being rolled out. European Central Bank Executive Board member Fabio Panetta said Monday that monetary policy will have to remain supportive until “well beyond the end” of the pandemic.

“Looking beyond possible short-term data distortions, the general outlook for the German economy has clearly improved,” Carsten Brzeski, an economist at ING Germany, said in a note. “With the prospect of at least 50% of the adult population having had a first jab before the summer, a more substantial reopening of the economy should not be too far away.”

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