MNI POLICY: German Stimulus Could Add 1% GDP-Bundesbank

By Luke Heighton

     FRANKFURT (MNI) - Germany's economy will shrink by 7% this year, before GDP

increases by 3% in 2021 and 4% in 2022, the Bundesbank reported Friday, with the

newly announced EUR130 billion federal stimulus package likely to make an

additional positive contribution.

     Bundesbank president Jens Weidmann said the June 4 announcement in Berlin

was "appropriate in light of the current situation," and would add to the

"substantial contribution" made by existing fiscal support measures.

     The economic outlook was now noticeably more favourable as a result, he

added. "However, there is still a very high degree of uncertainty about what

lies ahead for the economy," with an even steeper decline expected in Q2 than

observed in Q1.

     The German central bank expects consumer price inflation to drop to 0.8% in

2020, rising to 1.1% and 1.6% in 2021 and 2022, respectively.

     A deficit of 6% of GDP and a debt ratio of around 75% are envisaged this

year, the Bundesbank report noted, before gradually improving. The deficit ratio

will be significantly lower again in 2022. The debt ratio will also decline

somewhat, but will still be well above its pre-crisis level of around 60%.

     Under alternative less- or more- severe scenarios, GDP could contract by as

little as 3% or as much as 10% this year, according to Bundesbank projections,

before recovering by 6% next year or continuing to fall at the rate of -1%.

     The projections assume that an effective medical solution for the pandemic

will become available in mid-2021.

     Taking into account the effects of the latest stimulus package, the

government deficit could increase by 1.5% of GDP in 2020 and 0.5% of GDP in 2021

compared with the projection, according to an initial rough estimate, the bank

said.

     Real GDP could be 1% higher in 2020 and around 0.5% higher next year thanks

to the package, it added, with the proposed VAT cut having a "noticeable" impact

on price developments.

     "A full and immediate pass-through would reduce the rate by around one

percentage point this year and, mirroring this development, increase it by one

percentage point in the coming year. However, only an incomplete pass-through is

expected," it added.

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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