German economy’s Covid-19 hit may be smaller than feared

Germany may weather its pandemic-induced recession better than expected, private sector indicators suggested on Tuesday, in a hopeful sign for the economy that traditionally serves as Europe's driver of growth.

With much economic activity still constrained by COVID-19, Germany's government moved swiftly to boost spending and that cash, along with another shot in the arm from the European Central Bank, appears to have cushioned the pandemic's impact.

Gross domestic product is now only seen shrinking by 5.2 per cent this year, the Ifo institute projected, more optimistic than its previous estimate for a 6.7 per cent drop and the Bundesbank's 7.1 per cent forecast.

"The decline in the second quarter and the recovery are currently developing more favourably than we had expected," Ifo chief economist Timo Wollmershaeuser said.

For 2021 it cut its growth forecast to 5.1 per cent from 6.4 per cent, but even that indicates that Germany's economy could be close to its pre-crisis level by the end of next year. The ECB still expects the euro zone as a whole to need a further year to make up the decline.

Part of the forecast improvement is unexpectedly resilient consumption, and the HDE retail association said it expects nominal retail sales to grow by 1.5 per cent this year, a sharp upward revision from its previous estimate for a 4 per cent drop.

However, both it and the Ifo pointed to unusual uncertainty in their projections, with a second wave of infections and potential government restrictions seen as risk factors.