No-deal Brexit would ‘slam German growth’ in 2020

Britain quitting the European Union without a deal on October 31th would deal a harsh blow to Germany's already stuttering economy in 2020, leading think-tanks said in Berlin Wednesday.

No-deal Brexit would 'slam German growth' in 2020
An anti-Brexit protester wears a pro-EU hat in Manchester on Sunday. Photo: DPA

Britain quitting the European Union without a deal on October 31th would deal a harsh blow to Germany's already stuttering economy in 2020, leading think-tanks said in Berlin Wednesday.

“For the coming year, we should reckon with a deduction of 0.4 percentage points” in growth if Britain crashes out, experts from five leading economic institutes said in a joint statement.

By contrast, “if Britain's future relationship with the EU is reliably clarified, there should be a swift brightening of economic prospects,” they added.

READ ALSO: German-British trade plummets as no-deal Brexit warnings intensify

A no-deal Brexit would create new barriers at UK-EU borders as both sides are legally required to levy tariffs and check goods for regulatory compliance, while trade in some services could be stopped or hindered.

Combined with a fall in the pound and massively increased uncertainty over future economic relationships undermining business investment and consumer spending, British demand for imports would fall.

That would have direct and indirect effects on the biggest manufacturing economies in the 19-nation eurozone.

“Above all Germany, but also Italy and the Netherlands” would be hardest hit by a no-deal Brexit, the think-tanks found.

Nevertheless, there would be “no dramatic collapse in economic development
in the euro area,” they added.

Germany is widely believed to have suffered a technical recession — two
successive quarters of negative growth — over the summer, after its economy
shrank by 0.1 percent between April and June.

READ ALSO: German economy is 'down on its knees': Is a recession looming?

“The United States' trade conflicts with China and the EU,” as well as
Brexit uncertainty, were to blame for slowing investment worldwide weighing on
German manufacturing firms, the economists said.

Meanwhile, output in the vital automotive industry has fallen more than 20 percent since mid-2018, they noted, reflecting producers pushing through a costly and complex transition to electric and autonomous driving.

While consumer confidence remains high and the services sector has proven resilient, there are signs industrial weakness is spreading into that part of
the economy, too.

Looking ahead, the economists expect growth of 0.5 percent in 2019 and 1.1 percent in 2020 — 0.3 and 0.7 percentage points lower compared with forecasts earlier this year.

But “an economic crisis with marked capacity under-utilization should not be expected, even if downside risks to growth are currently high,” the think-tanks said.

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.