It now seems impossible that the German economy will recover as strongly this year as it was hoped for at the beginning of the year.

The supply bottlenecks for important raw materials and intermediate products are weighing too heavily on industrial companies.

Last week, three of the five major economic research institutes corrected their economic forecasts, in some cases significantly downwards.

Now the Munich-based Ifo Institute has also capped its expectations for 2021. Economists expect gross domestic product (GDP) to grow by 2.5 percent.

Previously, they had assumed an increase in economic output of 3.3 percent.

"The strong recovery after Corona, which was originally expected for the summer, continues to be postponed," said Ifo economic director Timo Wollmershäuser.

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The economy is currently "split", he explained.

While the service providers have recovered strongly from the Corona crisis, industrial production is shrinking as a result of delivery bottlenecks for important preliminary products.

The sudden increase in global demand for durable consumer goods, electronic items and special medical products has brought many manufacturers of industrial intermediate products to their capacity limits.

"In addition, the global supply chains were confronted with enormous logistical challenges as a result of greatly changed flows of goods," said Wollmershäuser.

Bottlenecks until the end of the year

Industrial production had already shrunk by 1.3 percent in the second quarter. There is likely to be another decline in the third quarter - even though the order books are full. The Federal Statistical Office reported a record number of new orders for July. German industrial companies have not received as many orders since reunification. Compared to February 2020, the month before the start of the Corona restrictions, incoming orders were 15.7 percent higher. The range of the orders has recently increased to more than seven months - that is how long the industrial companies would theoretically have to produce without new incoming orders in order to process the existing orders, assuming sales remained the same. It is likely, however, that the orders will continue to accumulate for the time being.Because the bottlenecks in the supply of raw materials and preliminary products are getting worse. According to a survey by the Ifo Institute, around 70 percent of the companies surveyed said in August that their production was being hindered by the bottlenecks.

The Ifo economists predict that the delivery bottlenecks will only become less important towards the end of the year. This is based on the assumption that the shifts in the structure of demand are likely to gradually reverse again as the pandemic subsides and that one of the causes of the delivery bottlenecks will disappear, explained Wollmershäuser. A strong recovery in the industry can then be expected for 2022 - after all, the existing orders would have to be processed. The German economy could then grow by 5.1 percent. That would be the biggest increase in growth since reunification. 

Other institutes also expect the German economy to really take off in the coming year. The German Institute for Economic Research (DIW) from Berlin and the RWI in Essen each forecast GDP growth of 4.9 percent for 2022. So far they had assumed 4.3 and 4.7 percent. The RWI remains comparatively optimistic for the year 2021 as well. The Essen economists only corrected their forecast by 0.2 percent down to 3.5 percent. DIW went there cut its growth expectations from 3.2 to 2.1 percent. The economists at the Leibniz Institute for Economic Research in Halle (IWH) rate the growth prospects in a similar way. They cut their forecast for the current year from 3.9 percent to 2.2 percent. For 2022, the Halle economists then expect growth of 3.6 percent.

157.3 billion euros deficit

According to the Ifo forecast, the upswing will be supported not only by private consumer spending but also by more favorable income and employment prospects.

Already in the second quarter the employment growth among service providers increased strongly and unemployment fell significantly.

According to the Ifo economists, this will continue.

The number of unemployed will fall from 2.6 million this year to 2.4 in 2022.

The decline in short-time working will also continue and reach the pre-crisis level in the coming year.

The fact that short-time work has already fallen noticeably is also boosting real wages. As the Federal Statistical Office announced on Wednesday, earnings rose nominally by 5.5 percent in the second quarter compared to the previous quarter. Adjusted for price, the increase was 3 percent. “This overcompensated for the nominal wage losses of 4 percent from the 2nd quarter of 2020. However, the significant rise in inflation has resulted in employees not yet earning as much in real terms as they were before the crisis, ”said Susanna Geisler, head of earnings statistics at the Federal Statistical Office.

With the reduction in short-time work, the paid weekly working hours of full-time employees also normalized.

Compared to the previous quarter, it rose in the second quarter by an average of 4.2 percent to 38.3 hours.

However, the pre-crisis level of 39.2 hours from the second quarter has not yet been reached again.

Ifo economists see the budget deficit at 157.3 billion euros this year.

In the coming year, however, it should shrink to 52.1 billion euros, and in 2023 the state budget should be balanced again for the first time.

However, this forecast was calculated on the assumption that only the currently decided economic and financial policy measures will be implemented.

That could change after the general election on Sunday, however, as a new government is considered likely.

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