Personal-Financial.com: Federal Finance Minister Scholz spoke of the economic stimulus package as saying that one wanted to “come out of the crisis with a bang”. Is the “boom” big enough for that?
PETER BOFINGER: The economic stimulus program is designed according to the motto “block and don’t mess”, so the “bang” is clearly there. And that also corresponds to the severity of the recession – the worst in the German post-war period. This is also shown by the unemployment figures, which, despite historically high short-time working, have increased seasonally adjusted by almost 600,000 unemployed in the past two months. This increase is significantly stronger than in the financial crisis of 2008/2009. This is a threatening situation that requires vigorous intervention. The Federal Government has therefore acted exactly as it would now.
Economic output is expected to decline even more in the second quarter than in the first. How difficult will the recession develop?
In any case, economic output will drop significantly again in the second quarter. Because April and May were bad, as the retail sales and unemployment figures show. For the rest of the year, there is still a problem of great uncertainty among both consumers and investors. In view of Germany’s increasing dependence on exports, the question remains for companies of how things will go in the rest of the world – even if strong impulses are set in Germany. It will therefore be well into the coming year until the German economy reaches the pre-crisis level.
Which of the different recession scenarios do you think best corresponds to the development so far?
The Swoosh logo of the Nike brand actually describes the course quite well. We will remain in this valley for some time before the economy picks up again significantly.
The question is then of course whether a second wave of corona infections will come again …
I am of course not a virologist, but I would see a second wave as not so bad for the economy. Because unlike in March, when the pandemic caught us by surprise and we closed everything in a panic, we can now deal with the situation much better. I can therefore hardly imagine that the second wave is as uncontrolled as the first. So when it comes, we should be able to do it with lower economic costs than the first one.
Which sectors will the recession hit most sustainably?
The industry is particularly affected. This is also shown by the ifo business climate index: the situation for retail and service providers improved somewhat again in May, and for industry it worsened further. Our industry is very export-oriented and also very auto-oriented. We have done very well with this business model in the past decade, now it is increasingly becoming a problem. Our European neighbors have much less opportunity than we do to support the economy with voluminous programs. So it will be a long time before they get back on their feet. In addition, the auto industry has had structural problems before, which Corona adds to the problem of demand. That’s why I think the auto industry is also suffering the most. Of course, this also applies to trade fairs and events.
What about private consumption? Will he get dressed soon?
What is special about this recession is that it hits domestic demand. Classic recessions come from exports, investments or housing, but not from private consumption. The measures taken by the federal government have made an important contribution to ensuring that private consumption stabilizes again by the end of the year. I would doubt that the consumer’s buying mood will return to pre-crisis levels by then. Because some of the people are afraid to buy with the mask and others are worried about their own workplaces, which doesn’t exactly stimulate consumption.
Which factors in Germany are decisive for the further development of the economy?
Of course, you have to see that Germany is not in the best shape to get into this crisis. We already saw stagnation and a noticeable decline in production in the automotive sector in 2019. So there were weaknesses even before Corona, which will not improve in the crisis. The Federal Government has now done a great deal to stabilize the domestic economy: There are targeted measures for the sectors in which sales have fallen particularly sharply. The loss carry-back will be expanded so that the companies can offset losses this year with the profits from the previous year – this is a very effective instrument.
And then there’s the VAT cut from July 1st…
However, I would have liked the VAT reduction to be more focused, so that it would, for example, benefit stationary retailers and service providers such as hotels and restaurants. On the other hand, a broad cut in value added tax, as is now being planned, could to a large extent benefit online trade, which has even benefited from the crisis. Overall, the program is based on the motto “A lot helps a lot”. I am therefore optimistic that the domestic economy will stabilize to some extent.
When can the economy start to recover at the earliest?
It depends on the medical development. In principle, the development can be divided into three phases. The first was the lockdown phase. We are currently in the “New Normal” phase, which is anything but normal. And the right turning point comes when we have this virus under control – so when there is a vaccine and medication for treatment – and we can return to everyday life before Corona. Only then are we in normal mode. The question of economic developments therefore depends heavily on whether we will continue to live this way well into 2021 under the current conditions or whether there will be a vaccine and medicines for the virus by the end of 2020 – and you can live normally again in 2021 .
Peter Bofinger is professor of economics at the University of Würzburg. From March 2004 to February 2019, he was a member of the Council of Experts for the assessment of the overall economic development, the so-called “economic practices”. The independent body advises the Federal Government on economic policy issues