Losing momentum Berlin slashes growth forecast but recovery seen intact

As prospects for Germany's economic health continue to soften, consumer demand is still seen outgunning Brexit and other risks.
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"Race to the bottom" is taking on new meaning as economists trip over each other to lower their forecasts for Germany’s GDP growth.

Late Thursday, that trend was confirmed as the country's economics ministry slashed its 2019 growth forecast to just 1.0 percent, according to the ministry's annual economic report due out next week but already seen by Handelsbatt. That's a significant cut from the government's previous forecast of a 1.8 percent rise this year.

The revision follows the International Monetary Fund's cut in expected German growth to 1.3 percent this year, as included in the World Economic Report presented this week. Last October, the IMF had projected 1.9 percent growth for 2019.

And on Friday, the respected Ifo economic institute said its German business climate index fell in January for the fifth month in a row, reaching the lowest level since February 2016. The German economy has entered a "downturn," the Ifo said, noting that managers are taking a dimmer view of corporate prospects for the next six months. Last month, the institute cut its 2019 forecast for German GDP to 1.1 percent from 1.9 percent.

Nonetheless, analysts maintain that Germany’s economic recovery is intact, having only lost some momentum. In the fourth quarter, there was a modest GDP gain after a slight dip in the previous three months, leaving a full-year increase of 1.5 percent – the ninth year straight year of expansion. Moreover, the economy is seen bouncing back to 1.6 percent growth in 2020, the ministry report said. The 2018 increase marked a slowdown, however, from the stronger performance of the previous two years, when GDP rose 2.2 percent.

Domestic consumer demand supported last year’s growth and will keep it stable this year as Brexit uncertainties and global trade tensions weigh down the export economy.

European Central Bank President Mario Draghi acknowledged on Thursday that risks to the euro-zone economy had tilted to the downside, because of Brexit and the economic slowdown in China.

Auto crisis, China weigh on orders

HIS Markit provided further evidence of the German slowdown as its Purchasing Managers Index for manufacturers fell again, by 1.6 points to 49.9, sinking below 50 for the first time since November 2014. Economists surveyed by Reuters had expected only a slight drop to 51.3. A level of 50 or more signals growth.

A sharp drop in order inflow, which declined the most since 2012, was the main factor in the decline of the manufacturing index.

The PMI for service industries, on the other hand, posted a gain of 1.3 points to 53.1. The combined index as a result was up 0.5 points to 52.1.

The disruption in automobile production in the fall because of delays in getting new emissions certifications has been blamed both for the third-quarter downturn and the lasting sluggishness of the economy. This point of view was widely shared in the Markit survey. Last summer's severe drought, which severely delayed industrial shipments on the Rhine, also had an effect, economists said.

“The crisis in the automobile sector and declining demand from China were the deciding factors, in the unanimous opinion of most respondents,” according to Phil Smith at Markit. The service sector, on the other hand, is beginning to feel upward pressure on wages, which contributed both to an increase in costs and higher prices.

Overall, however, the slight increase in the indicator was one of the weakest in four years, Markit said.

Martin Greive and Donata Riedel are economic reporters for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the authors: [email protected] and [email protected]