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German economic recovery stumbles as Covid cases hit record high

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Germany risks becoming the eurozone’s economic laggard, as economists worry that restrictions to contain a fresh surge in Covid-19 infections will hit consumer activity and compound the supply chain problems already throttling industrial output.

The German Council of Economic Experts, which advises the government, became the latest group to cut its forecasts for growth in Europe’s largest economy on Wednesday, warning that supply problems are taking a greater toll than expected on manufacturers.

“These supply-side bottlenecks are slowing down industrial production above all, and Germany is affected particularly badly by this, more than countries in which industry makes up a smaller share of GDP,” said Volker Wieland, professor of monetary economy at Frankfurt’s Goethe university.

 Wieland said the country’s economic recovery remained intact, although it “will be a little delayed until the bottlenecks are gradually resolved”. The council cut its growth forecast for this year from 3.1 to 2.7 per cent, but raised its prediction for growth next year from 4 to 4.6 per cent.

That would give Germany one of the slowest 2021 growth rates in the eurozone, where overall output is expected to be 4 per cent higher this year. Although the German economy declined less than most eurozone countries last year, it is expected to take longer to return to pre-pandemic levels than the bloc overall — although Spain remains further behind.

For the fourth quarter, the council forecast the German economy would grow only 0.4 per cent, down from 1.8 per cent in the third quarter and well below the 1.2 per cent the European Central Bank forecast for the overall eurozone in the final three months of 2021.

“Germany is increasingly looking like the laggard of the euro area,” said Holger Schmieding, chief economist at Berenberg.

Another factor that economists see weighing is the steep rise in Covid-19 infections, with almost 40,000 new daily cases reported on Wednesday, taking the seven-day infection rate to a new record high of 232 per 100,000 people.

“The government must remove all the restrictions on growth imposed during the pandemic, by successfully stepping up the vaccination campaign,” the BDI, Germany’s main business lobby, said in statement in response to the economic council’s report.

“The authorities must do all in their power to ensure that the vaccination numbers rise again,” it added. “We cannot allow a small group of anti-vaxxers to paralyse society as a whole.”

Some regional governments, such as Hamburg and Saxony, are stepping up pressure on people to get jabbed by restricting access to restaurants, gyms and other indoor public spaces to those who have been vaccinated or recovered from the virus.

Oliver Rakau, economist at Oxford Economics, said rising Covid-19 infections were one reason he recently cut his German growth forecast.

“I think it is a bit under-appreciated that the services sector might struggle into the fourth quarter because if you look at the Google Mobility data, there are already signs that higher Covid infections are causing a slowdown in consumer services,” said Rakau.

Just over 66 per cent of Germany’s population has been fully vaccinated.

Wieland, however, played down the risk that another lockdown could paralyse the economy, saying: “If businesses are closed down, that will lead to a slowdown in winter. But I don’t think it’s likely that it will come to that.”

He said so-called “2G rules”, preventing unvaccinated people from accessing indoor spaces, had spurred an increase in vaccination rates in other countries. “It can even accelerate growth,” he added.

Katharina Utermöhl, economist at Allianz, said rising German inflation, which reached a 28-year-high of 4.6 per cent in October, would also reduce disposable income for households. “Consumption remains our last hope for growth in the winter months, but the downside risks to that are growing,” she said.

The council raised its forecast for annualised German inflation from 2.1 to 3.1 per cent this year and from 1.9 to 2.6 per cent next year.

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