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German economy could shrink by 5.4% this year due to coronavirus - advisors

BERLIN (Reuters) - The coronavirus outbreak will push Germany into recession in the first half of this year and could result in output in Europe’s largest economy contracting by up to 5.4% this year, Germany’s council of economic advisers said on Monday.

Germany is in virtual lockdown, with more than 57,000 people infected and 455 deaths from the virus. Schools, shops, restaurants and sports facilities have closed and many firms have stopped production to help slow the spread of the disease.

The panel that advises the government said its baseline scenario - in which the economic situation would normalise over the summer - was for the economy to contract by 2.8% this year before potentially growing by 3.7% next year.

The advisers said a more marked ‘V’ shaped recession curve with widespread halts to production or longer-lasting public health measures could lead to the economy contracting by 5.4% this year before growing by 4.9% in 2021 thanks in part to a statistical overhang.

“The coronavirus outbreak has stopped the incipient recovery,” the advisors said in a report that they handed to the government on March 23 but published on Monday. “The German economy will shrink significantly in 2020.”

Others have been more pessimistic, with the Ifo Institute for Economic Research saying output could decline by as much as 20% this year and the German Economic Institute saying it could shrink by 10%.

Parliament suspended Germany’s constitutionally enshrined debt brake last week and approved a stimulus package worth more than 750 billion euros ($831.60 billion) to help cope with the economic fallout.

GLOOMY SUMMER

Data published last week painted a gloomy picture, with German business morale and private sector business activity falling to their lowest levels since the global financial crisis of 2008-2009. Almost one in five German companies sees itself at acute risk of insolvency.

Several think tanks and politicians have said Germany must ensure its shutdown does not cripple the economy, but Chancellor Angela Merkel spoke out at the weekend against a quick loosening of restrictions.

Volker Wieland, one of the economic advisers, said the crisis would transform some sectors of the economy, with the experience of working from home and video conferencing to have an impact on business travel, for example. But he said these areas were not big enough, or their impact negative enough, for this to affect the economy much overall.

The panel said euro zone governments could stabilise expectations on financial markets by sending a clear signal that extra fiscal resources will be immediately made available via existing instruments such as the European Stability Mechanism if necessary.

Advisers were deeply divided over whether issuing common euro bonds was the right response to the crisis. But one, Achim Truger, said the idea seemed to be gaining ground even among leaders of EU countries that were traditionally sceptical of proposals for euro bonds.

“In the short term it’s good to focus on the ESM because that’s quick,” he said. “But the government would be well advised not to rule out a common solution.”

($1 = 0.9019 euros)

Additional reporting by Thomas Escritt, Editing by Timothy Heritage

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