Germany expects the blow from the coronavirus crisis to be less severe than feared, as the country reduces its traditional reliance on exports.

Chancellor Angela Merkel’s administration forecast that national output will shrink by 5.8% this year. While that still marks one of the worst recessions since the end of World War II, it’s smaller contraction than an April prediction of 6.3%, as efforts to shore up domestic demand bear fruit.

The relatively moderate decline is “an important sign that we have managed to stabilize domestic demand and decouple to a great extent from global economic developments,” Economy Minister Peter Altmaier said Tuesday at a press conference in Berlin. “We are looking at an unexpectedly fast V-shaped recovery,” and the worst is over, he said.

The government forecast a 12.1% drop in exports this year, compared with a decline of 8.1% for imports and 3.6% for domestic consumption. Germany’s trade surplus was one of the sources of tensions with President Donald Trump, and U.S. trade conflicts with China have hit Germany, even before the pandemic decimated economies across the world.

Germany’s domestic shift may continue. While the country can avoid another nationwide shutdown despite a recent upsurge in infections, its trading partners may need to rein in activity, Altmaier said.

“The global economic environment could remain difficult for a longer time,” he said. “The global recession will be significantly stronger” than during the financial crisis in 2008 and 2009.

Still, Germany’s recovery will be less robust, with 2021 growth of 4.4%. That’s lower than the previous projection of a 5.2% expansion, and pre-crisis levels won’t likely be reached until 2022, Altmaier said.

What Our Economists Say:

“The new forecasts have less of a dip, and therefore a less pronounced recovery. That puts output to a similar spot, but there will be somewhat less pain along the way.”

Activity in Europe’s biggest economy has staged a strong rebound after collapsing in the second quarter, and German companies have turned slightly more optimistic that the economy will continue on its long road to recovery.

Reports on Tuesday showed that German unemployment declined in August and a gauge of factory activity rose to a 22-month high. Still, the manufacturing report from IHS Markit wasn’t all positive. The machinery and equipment sectors—which are more exposed to global demand—remain weak, and businesses continued to cut jobs.

To soften the blow from the pandemic, Merkel’s government suspended constitutional debt limits as part of a massive stimulus program, including cutting value-added taxes and providing money to families. The efforts were mainly focused on getting Germans to spend.

Altmaier said Germany will emerge stronger from the crisis, and his optimistic assessment marks a stark contrast to Merkel’s stern warning last week. The chancellor said the coronavirus crisis will get worse before it gets better, defending her government’s move to abandon its balanced-budget policy.

“I am firmly convinced that it is a good decision to take on a high degree of debt because anything else would mean we would be in the grip of the pandemic for a lot longer,” Merkel said in her annual summer press conference on Friday.