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Free AccessMNI INTERVIEW: German Experts' Council May Cut Growth Forecast
--Council Chairman Lars Feld Says Risk Scenario Already Reached
--Second Covid Wave Could Prompt "L-Shaped" Economic Path
By Luke Heighton
FRANKFURT(MNI) - The German Council of Economic Experts may cut its growth
forecasts, chairman Lars Feld said in an interview with MNI, after previous
estimates proved "too optimistic" and amid fears of an "enormously damaging"
second wave of Covid-19 infections.
The Council's baseline scenario in March was for GDP to contract by 2.8% in
2020 and expand by 3.7% in 2021. However, a longer domestic and global shutdown
and differences in the speed of reopening and recovery means the 'risk scenario'
of a decline in output of at least 5.5% has already been reached, Feld said,
leaving a 6.3% GDP reduction this year "much more probable."
"If we had to shut down again later in September or October to the same
extent as we did in April the damage would be enormous," Feld said, "and a
V-shape or a U-shape would not be feasible any more. It might rather be a W or
even an L in this case. But if we can avoid the second wave, and if a
large-scale bankruptcy of many firms in the German economy can be avoided, then
we have a higher probability of a V."
Feld approved of fiscal measures already taken by the federal government,
and added in the conversation on May 12 that a post-crisis German GDP-to-debt
ratio of 68-70% may be more likely than the official estimate of 75%. In either
scenario, he stressed, there remains "enormous fiscal space if needed for
expansionary fiscal policy" in 2021.
--MORE AID FOR COMPANIES
Any discussion of post-crisis tax increases or austerity measures is not
"useful at the moment" Feld said, adding that he would prefer to increase
spending "on social policy grounds, perhaps on families with children. More
importantly, however, would be tax measures. What I'm thinking of in particular
are less restrictive, more generous loss-carry backward provisions for firms,
which would provide them with liquidity."
Feld does not anticipate any fundamental change in German attitudes towards
balanced budgets once the current crisis has passed.
"I don't think that there is going to be a greater tolerance of debt
afterwards," he said. "We [the Council] have always argued that the fiscal space
for investment without additional government debt is large. When you think about
the additional spending on social transfers, the government could instead have
used this money for infrastructure spending."
--EXPORT-BASED MODEL
Feld is "basically in favour" of maintaining Germany's current,
export-based economic model. But the world after the pandemic crisis will
"necessarily will be different," he said, and the different timings of
recoveries in the U.S. and China "calls for an adjustment of the way we think
about economic development in Germany [...] such that firms in Germany realise
that they have to have a diversification of their supply chains."
"An expansionary fiscal policy must ensure that each euro spent is most
effectively inducing economic activity in Germany," he explained. "It might be
more expensive for the federal finance ministry to do more general measures than
to do a cash-for-clunkers scheme, for example, but it is more effective than
supporting particular industries that have the strongest interest group
representation at the federal level."
Equally, Feld said, it is important that key structural reforms begun by
the German government before the crisis struck - digitisation and the climate
package in particular - continue once it is over. But he was "not so sure we
should endorse the more ambitious climate policy goals of the European
Commission. I was not in favour before the pandemic, and I'm not in favour of it
now. But carbon pricing schemes must continue to be established and to work
better."
--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com
[TOPICS: M$E$$$,M$G$$$,M$X$$$,MC$$$$,MT$$$$,MX$$$$,MFG$$$]
To read the full story
Sign up now for free trial access to this content.
Please enter your details below.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.