MNI INTERVIEW-2: German Wise Man Truger Upbeat On Outlook

The German economy could recover to pre-pandemic levels as soon as early next year and a strong V-shape is still a possibility, one of the German Council of Economic Experts, Achim Truger, told MNI in an interview.

Truger points to recent domestic order data as a positive indication behind his assessment that the upturn in Germany could outperform the Council's latest forecast, published in June, of an "asymmetric V-shape, where the upturn is a bit slow."

Near-term downside risks from bankruptcies and job losses could be effectively addressed by further government action, Truger believes, although the economist acknowledges it is still too soon to say how deep and lasting the economic damage caused by Covid-19 will turn out to be, especially if infection rates surge again.

"There are some voices telling us that the strong V is still a possibility, because incoming order data is very good. So there is some positive risk that things will turn out better than expected, but at the moment we are on track with our forecast," Truger, who joined the government advisory body in March 2019, said.

"We do expect that there will be more bankruptcies in the autumn," he continued, "and there is the risk that this could cause severe damage to the recovery, but that's something that we really don't know. And if it happens, if the risk is large, then the government could do something about it, and recent experience makes me optimistic that they would."

STRONGER FISCAL CALL

Truger expects what he sees as Berlin's impressive fiscal response to the crisis to continue for as long as necessary, with little chance of a premature withdrawal of support, as the treasury continues to take full advantage of ready access to capital markets and low interest rates.

He claims that harmony has broken out within his own Council, informing MNI that "where there used to be different opinions, we have had unanimous support for the measures taken, and so I don't think there's any reason to believe the government will not go on with rational reactions, and it will do whatever it takes."

One "real problem" for Truger that will need to be addressed, and may soon produce a change in strategy, are the high levels of corporate debt resulting from liquidity-starved companies taking on state-backed loans. "In the end it may be necessary to switch more towards income support and not insist on paying back the debt" he said. "But that's something we will see over the next quarter or two quarters."

The 3% temporary cut in VAT introduced in July should not be extended beyond its January 2021 cut-off point, he added, since the resultant EUR 40bn shortfall in annual revenue would create the "real risk" of austerity measures being introduced.

That risk is already present at local level, Truger said, where individual states' debt brake restrictions are expected to curtail public spending between this year and next. Truger sees a similar process likely to occur among German municipalities where, despite measures included in the Federal government's latest fiscal package intended to prevent huge revenue losses, there will be "some serious problems."

For Truger, the battle is to persuade the government to boost public investment by an even more flexible application of the debt brake, but he says there is a risk that this does not happen.