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The economic roller coaster ride looks set to continue: The German economy is in for a sharp growth setback in early 2021.

German GDP largely stagnated in Q4 2020 as the “lockdown light” approach pursued between November and mid-December, together with a resilient manufacturing sector – thanks in particular to a tailwind from Chinese export demand – helped contain the adverse impact on the economy. However, with notably tighter Covid-19 restrictions in place since mid-December, things will get worse before they get better in 2021.

Overall, we maintain our GDP growth forecast of +3.5% for 2021 – while acknowledging elevated downside risks for H1 should the lockdown be tightened further and/or be prolonged and for H2 should the vaccination rollout fall behind our expectations.

In 2022, we expect GDP growth to remain notably above potential at +3.8% as the achievement of herd immunity would allow for a return to economic normalcy while monetary and fiscal policy remain supportive. As a result, the German economy should reach its pre-crisis GDP level in H1 2022, whereas other economies in the Eurozone, including Spain and Italy, will need an additional year to heal.

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