International coordination helpful to overcome pandemic

Construction investment and investment in other assets (software, research and development) should also turn around in the course of this year. All in all, gross fixed capital formation is set to increase by 3.2 percent year on year.

Overall, we anticipate a 3.5 percent increase in gross domestic product in 2022 overall compared to the previous year in real terms. This forecast is based on the assumption that a large section of the population will be vaccinated by autumn and that economic activity will no longer be restricted by precautionary measures to combat the pandemic and that supply chains will get back to normal in the second half of the year.

International coordination helpful to overcome pandemic

Closer collaboration and coordination of economic, financial and public health policy measures, at least among the major democracies, is definitely the best option to overcome the economic impact of the pandemic. Germany can use its G7 presidency to play a constructive role in this process.

Carefully scaled rescue and growth measures probably needed

In spring, the economic and financial policy measures to the fourth and foreseeable fifth wave will need to be carefully reviewed to check whether the response has been sufficient or whether further measures are necessary to safeguard stability. The growth targets of the governments of almost all G7 countries are not likely to be met as the fifth wave is set to be much too strong. Renewed liquidity and solvency measures to support companies will be unavoidable. At the same time, it will prove to be a more difficult undertaking as those contact-intensive industries that are already in a weakened economic position will be most affected once again. Liquidity assistance, which has helped in the past, will also help again in the short term but the focus may need to shift more than in previous waves to simple equity assistance for those companies that are generally solvent.

Further stimulating growth on the same scale as in 2020 and 2021, which saw ambitious packages in the European G7 countries, would not be useful or appropriate but could, on a smaller scale, nonetheless help to compensate for the loss of economic output. Additional measures should be more targeted to bolster the twin transformation and encourage private investment above all, particularly given that the EU Recovery and Resilience Programme focused on public investment has got off to a good start and cannot be upscaled in the short term. In Germany, measures to strengthen investment activity are already on the agenda as outlined in the coalition agreement. The United States will likely need to reintroduce labour market policy measures. Japan has already passed a large-scale package. France could possibly step up its support measures. Italy is already very engaged with the implementation of a large package. Canada still has some scope if necessary. In addition, the G7 governments should underline their intentions to consolidate public finances in the medium term.

Central banks cannot march in step

This would also make the lives easier for the central banks that are already faced with responding to manifold supply shocks and the very partial positive shocks in demand. On account of the divergent economic and pandemic situation in the individual countries, the central banks of the G7 countries need to take different approaches with an earlier tightening and perhaps more substantial response to the developments of the pandemic in the United States and in the United Kingdom than in the Euro area and in Japan.