Picture used for illustrative purpose. File

Germany's Ifo institute on Tuesday said Europe's largest economy would likely shrink by 5.2% this year, raising its previous estimate for a 6.7% drop, in the latest sign the damage caused by the COVID-19 pandemic could be smaller than initially feared.

"The decline in the second quarter and the recovery are currently developing more favourably than we had expected," Ifo chief economist Timo Wollmershaeuser said.

For 2021, Ifo cut its economic forecast for Germany to 5.1% growth from its previous estimate of 6.4%. It expects the economy to expand by 1.7% in 2022.

The number of people out of work is seen rising to 2.7 million this year from 2.3 million in 2019, before edging down to 2.6 million in 2021 and then to 2.5 million in 2022. 

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That would translate into a jump in the unemployment rate to 5.9% this year from 5.0% last year. The rate would then drop to 5.7% percent in 2021 and 5.5% in 2022, Ifo said.

The Ifo institute cautioned that there was an unusually high degree of uncertainty attached to the forecasts. It pointed to the rising number of coronavirus infections, the risk of a disorderly Brexit and unresolved trade disputes.

Reuters