FocusEconomics Germany

Germany Economic Outlook

Government opens spending taps further in June to boost the economy

In early June, the German government announced fresh stimulus of EUR 130 billion to kickstart the economy, bringing the total fiscal stimulus up to around EUR 1.2 trillion (roughly equivalent to around 35% of 2019 GDP) which has been unleashed as part of efforts to buttress the economy against fallout from Covid-19.

The new stimulus equals around 4% of GDP and encompasses numerous measures, including reducing the tax burden through temporarily lowering VATs until the end of this year, as well as further liquidity and loan support of around EUR 25 billion for SMEs through August, conditional on at least a 60% annual drop in sales in April and May. In addition, the government announced extra one-off child allowance; a EUR 50 billion fund focused on combating climate change; capping social contributions until at least next year to benefit net income; and financial support for local goverments struggling with reduced tax income.

Taken together, the fiscal response of the German government should pave the way for a strong economic recovery next year. However, the outlook hinges not only on domestic developments, especially the possibility of a serious second wave of infections, but also on the return of foreign demand, which helped Germany overcome previous crises and currently seems unlikely to provide a significant boost to the economy.

Source: FocusEconomics Consensus Forecast Major Economies July 2020

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Carsten Brzeski, chief Eurozone economist at ING, noted: “it is not only the size of the packages which is remarkable but also the fact that the German government has made a complete U-turn in its approach to fiscal policy.”

FocusEconomics Consensus Forecast panelists expect the economy to enter a deep recession, with GDP contracting 6.1%, which is up 0.2 percentage points from last month’s consensus forecast. For 2021, the panel expects the economy to rebound, with GDP growing 4.8%.

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