Economics Update November 2020 – The "lockdown light" and the consequences for the economy

The "lockdown light" for the month of November, which comes into force today, will disrupt the economic recovery in the next two quarters, but will not have such a strong impact as the lockdown in the spring. For one thing, shops will remain open this time - retail trade and car purchases will thus continue to be possible. On the other hand, industry is on a solid recovery path, which is, however, threatened by poorer prospects for exports to the surrounding euro zone. Exports, especially to China, should continue to benefit from the dynamic recovery there. However, the "lockdown light" will have a clearly negative effect on private consumption. Normally, more than 20 percent of private consumer spending in Germany is accounted for by the restaurant and hotel industry, leisure and culture, as well as parts of the transport sector such as bus travel, but also fuels, which are particularly affected by the recent restrictions. If hardly any money can be turned over in these areas for a month, a significant decline in private consumption and, as a result, an overall contraction in economic output can be expected in the fourth quarter.

At best, the recovery will continue

If the measures now taken succeed in bringing the pandemic under control again, the German economy should remain on a recovery course despite the "lockdown light". However, the recovery will also be very moderate in the first quarter of 2021 due to the foreseeable continued burden of the pandemic. Higher momentum is only expected from the second quarter of 2021 onwards. Overall, we therefore expect weaker growth of around 3 percent for the German economy in 2021 (previous assumption: 4.4 percent). In return, however, economic output should then increase by a further 4.4 percent in 2022 and return to the starting level of the end of 2019 in mid 2022.

Concern about economic collateral damage

A fundamentally worse picture would emerge if the infection incidence could not be brought under control with the current measures or if another drastic lockdown should become necessary in the course of the first quarter of 2021. In this case, there would be the threat of a significant increase in insolvencies and a renewed rise in unemployment. Economic output would then not only fall in the first quarter, but would also recover very slowly thereafter. The consequence would be that the German economy would then shrink again overall in 2021. A return to the initial level would not be foreseeable by the end of 2022. It is therefore very much to be hoped that in the coming weeks politicians will find a strategy to combat the pandemic in a targeted manner so as to rule out both new waves of infection and sustained damage to the economy as a whole.