Economy: German economy will grow by 2.7 percent in 2021 – Economy

The German economy grew by 2.7 percent in 2021, reports the Federal Statistical Office. Germany has thus recovered from the economic shock caused by the corona pandemic, which caused the economy to shrink by almost five percent in 2020 – the second worst slump since the Second World War. Despite some concerns, economic researchers expect more growth this year – and more jobs.

For Oliver Holtemöller, 2021 also brought disillusionment despite the recovery. “We started with the idea that the vaccine would end the pandemic by the end of the year at the latest,” says the Vice President of the Halle Institute for Economic Research (IWH). “Instead, there are still restrictions on personal contacts.” The gastronomy employed until the end of 2021 a quarter less employees than before the pandemic.

In the spring, the economy initially picked up. “Then the delivery bottlenecks appeared, which nobody had reckoned with. They slowed down growth significantly,” analyzes Monika Schnitzer. The economics professor at the LMU Munich means the transport problems, the lack of raw materials such as wood, but above all of chips. “The order books were full, the mood was good, but the companies couldn’t keep up with production because of the delivery bottlenecks.”

It was above all the strong exports and government spending that caused the economy to grow. The many aid measures drove the deficit in the state budget to 153 billion euros, the largest minus since reunification. Most of the new jobs were created in sectors such as education, health, information, communication and construction. Financially, social groups benefited differently. Employee wages rose by around 3 percent. In contrast, corporate and investment income, which had shrunk by 10 percent in 2020, increased by 15 percent.

Omikron could exacerbate the delivery bottleneck

In 2022, Monika Schnitzer, who advises the federal government in the Advisory Council, expects significantly higher growth. But there are barriers on the way – for example due to the current corona variant: “Omicron creates new problems”. Before the pandemic, the delivery time from China to the US by sea was 50 days. Most recently, she increased the delta variant from 85 to more than 100 days. Omikron could exacerbate the bottleneck.

If the new corona variant causes infections to shoot up, the Chinese government would have to paralyze entire cities in accordance with its strict course, which could restrict deliveries of preliminary products just as much as German exports to China. In Germany too, high numbers of infections could mean that many employees cannot come to work.

IWH economics chief Oliver Holtemöller expects a weak winter half-year if the current restrictions last until spring. In the last three months of 2021, the economy has already contracted. However, there are clear differences compared to last winter. Unlike back then, shops and restaurants will probably not be closed.

As soon as it gets warmer, the Germans are likely to consume a lot. “In this environment, companies are investing more again,” expects Holtemöller. He contradicts the diagnosis that Corona is completely changing consumer behavior. “Where people can, they go to the restaurant or the cinema and go on vacation. They often couldn’t because of the pandemic.” The supply chain problems also gradually resolved themselves.

All of this creates plenty of momentum: “Unemployment is likely to continue to fall. A shortage of skilled workers is becoming increasingly noticeable in companies.” Holtemöller expects 3.5 percent economic growth for 2022, Monika Schnitzer four percent. The German economy has only grown so strongly once since reunification – after the financial crisis of 2008/09. This would mean that economic output would reach the pre-pandemic level in the course of the year.

“The government should above all not do nonsense”

Of course, there are dangers that all this will not happen. For example, weaker growth in China. The Schnitzer economy is more concerned with other things: “The economy is being slowed down by the high energy prices. It cannot be ruled out that Russian President Vladimir Putin will take advantage of the situation and throttle gas supplies.” Permanently higher energy prices would put an additional burden on the economy. If the conflict in Ukraine escalates, things will get really explosive.

For Schnitzer, the real danger that the strong inflation of 2021 will continue comes from the energy sector: “If energy prices rise permanently, then that could increase inflation expectations and lead to higher wage demands”.

On the other hand, there is no sign that the current inflation alone will lead to a wage-price spiral in which wage demands and price increases push each other up. “The wage settlements so far, for example at Verdi, have been moderate,” says Schnitzer. “Also next year there will not be any pay rounds where one should expect high settlements.”

The economy counts among the economists who regard the current price increases as temporary. For 2022, she expects inflation to be just 2.6 percent after 3.1 percent last year.

Oliver Holtemöller calls on the federal government to exercise restraint in view of the economic recovery: “Above all, the government should not do anything nonsense. The production gap is closing. From a macroeconomic perspective, there is no need for stimulating measures.”

The new traffic light coalition should rather focus on the major challenges of the present: “The core problems lie in the areas of decarbonization, digitization and demography.” The demographic development, for example, in which the number of pensioners is increasing while the workforce is shrinking, increases the costs of social security. “This problem is neglected in the coalition agreement,” criticizes the researcher.

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