Economy & Politics

InterviewMichael Hüther: “We have arrived in the valley of tears”

Michael Hütherimago images / IPON

The German economy is expected to grow by 2.2 percent in the first quarter – the sharpest decline since the financial crisis. Forecasts in the second quarter point to an even stronger crash. The reason is the corona measures. Personal-Financial.com spoke to Michael Hüther, director and member of the executive committee of the employers’ institute for German economy in Cologne, about the recession and the upswing afterwards.

CAPITAL: How will the German economy develop?

MICHAEL HÜTHER: We have arrived in the Valley of Tears. That means the crash that we noticed in the second quarter, without us seeing it in official figures, has come to a halt. We will be significantly in the red in the second quarter – at minus 12 percent in the current rate. On an annual average, this would correspond to a shrinkage of 9 percent. This is economically and historically unique, if one omits the 1929 economic crisis. But that also means that we are on an upward path from the second to the third quarter, which will continue to support us after 2021. This is also signaled by the valuations of the stock markets, which have been astonishingly relaxed since the March low, as well as the business climate.

There are already several scenarios for a recession. Which is the most likely?

One can speak of a right flat V. The ascent from the low never goes as fast as the crash, because you have to sort out economically afterwards. In addition, the economic crash due to the lockdown was extremely fast this time. This means that the speed, which is also reflected in the GDP figures of minus 2.2 percent in the first quarter and minus 12 percent in the second quarter, will not be reflected positively in the third and fourth quarters. So in the scenario of a V recession we have a very steep V on the left and a flat one on the right.

In the current Ifo business climate index, the mood among entrepreneurs has already improved slightly. What role do expectations play for further development?

Pessimists say that clouded expectations last three years, but now they may only last a few months. The private sector should not be underestimated. Many sectors that were recently shut down, such as catering or retail, are now starting up again, albeit hesitantly. If this is combined with falling numbers of new infections, this development will continue. The possibility of going on vacation is another important mood lever. By mobilizing other economies again, this also stabilizes the labor market prospects. In this respect it is important that the positive messages increase – also as a surprise.

What does that mean for the extent of the recession?

When you look at it from the outside that there is an average 9 percent decline in the economy, it’s a shock at first. However, the course of events is such that by the end of 2021 the activity level that was before the crisis in early 2020 will be reached again. The unemployment rate in the labor market is expected to rise to 6.5 percent. Compared to earlier economic phases, this sounds relatively undramatic, especially given the higher level of employment. Compared to the financial crisis, we had an additional five million employees before Corona. It should therefore not be overlooked that in the initial situation one is in a relatively good position with regard to the level of employment, unemployment and public finances. Of course, that absorbs a lot.

It sounds like we’re getting away with one black eye again …

Nevertheless, there will be consequences. We will see a massive slump in investments this year. We therefore have to press ahead with the modernization of the capital stock with a view to the big questions of digitalization, climate change and demographic aging. I hope that the German economic and social model will come out of this crisis more positively than some think. We have seen the social partners take smart decisions relatively quickly. And we have a good health system. Both are stabilizing elements.

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