German Central Bank Slashes Economic Growth Forecast

Friday, 07 Dec 2012 07:21 AM

 

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The Bundesbank sliced more than 1 percentage point off its forecast for economic expansion in Germany next year after the sovereign debt crisis pushed the euro area into recession and global growth slowed.

The Bundesbank cut its 2013 projection to 0.4 percent from the 1.6 percent predicted in June and said the economy, Europe’s largest, will grow 0.7 percent this year, down from its previous forecast of 1 percent. The economy will contract in the fourth quarter and stagnate in the first, the Frankfurt-based central bank said Friday. It will recover to expand 1.9 percent in 2014, according to the new forecasts.

“The Bundesbank isn’t as negative as the 2013 growth forecast suggests,” said Alexander Koch, an economist at Unicredit Group in Munich. “The predicted contraction in the fourth quarter has a big impact on next year’s growth rate. In fact, the forecasts suggest the Bundesbank expects a recovery from spring leading to relatively strong growth in 2014.”

The 17-nation euro area, Germany’s largest export market, succumbed to recession in the third quarter as countries from Greece to Spain cut spending to rein in excessive deficits. Still, German business confidence unexpectedly rose in November and factory orders, an indicator for future production, surged in October on strong demand from outside the euro area.

‘Clouded’ Outlook

“Economic prospects have clouded in Germany” as a result of “a severe adjustment recession in parts of the euro region and the slowdown of the global economy,” the Bundesbank said. “However, there’s reasonable hope that the phase of economic weakness won’t last too long and Germany will return to growth.”

The Bundesbank revised down its 2013 inflation forecast for Germany to 1.5 percent from 1.6 percent and predicted annual consumer-price gains will average 1.6 percent in 2014. This year, inflation is seen at 2.1 percent.

That may help alleviate German inflation fears and open the door for further interest-rate cuts by the European Central Bank. ECB President Mario Draghi said Thursday the euro area won’t be able to shake off its slump until the second half of next year.

Euro-Area Forecasts

It “appears probable that the economic situation in the euro area will stabilize over the course of the coming year, and that a nascent recovery will follow, if only hesitantly at first,” the Bundesbank said. “The precondition for this is that the sovereign debt and banking crises in the euro area do not further intensify and that consolidation and reform efforts continue.”

The ECB Thursday cut its economic forecasts for the euro region, predicting contractions of 0.5 percent this year and 0.3 percent in 2013 before growth of 1.2 percent in 2014.

“It is quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection,” the Bundesbank said. “In this case, the German economy, in view of its sound underlying health, may be expected to utilize the additional growth opportunities that arise.”

On the other hand, “should global economic growth remain below expectations or the sovereign debt crisis escalate further in some countries, it is probable that the German economy may follow a weaker course than the one assumed in the baseline scenario,” it said, adding that the forecasts are subject to a “high degree of uncertainty” and downside risks predominate.

While Germany’s economic slowdown won’t significantly boost joblessness, employment growth can’t be expected to continue at the pace of the previous years, the Bundesbank said. It predicts the unemployment rate to rise from 6.8 percent this year to 7.2 percent in 2013, before declining again to 7 percent in 2014.

© Copyright 2014 Bloomberg News. All rights reserved.

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