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ECONOMY

Germany blames Brexit and trade wars for failing growth prospects

Germany on Thursday slashed its growth outlook for next year, saying it expects trade conflicts, Brexit and other sources of uncertainty abroad to continue weighing on the economy.

Germany blames Brexit and trade wars for failing growth prospects
Storm clouds looming over Frankfurt's banking centre. Photo: DPA

The first recession in nine years marks the end of a post-2008 golden decade for Europe's largest economy, which has enjoyed steady growth buoyed by both exports and domestic demand.

But the country's massive trade surplus — a source of national pride for many media outlets — has turned into a weakness since President Donald Trump launched his US-China trade war.

Other risks to international commerce, like Brexit uncertainty, have also weighed on Germany.

READ ALSO: No-deal Brexit would 'slam German growth' in 2020

Europe's largest economy should expand by 1.0 percent in 2020, the economy ministry said, down from a 1.5 percent forecast it made earlier this year.

Nevertheless, “even if prospects are currently muted, there is no threat of an economic crisis,” Economy Minister Peter Altmaier said in a statement.

“Export-oriented industries” are suffering, but “domestic growth remains intact” with “rising employment and incomes”, he added.

For the full year 2019, government economists stuck to their projection of 0.5 percent growth this year.

That is a fraction of the 1.4 percent achieved in 2018 or 2.2 percent the year before.

Germany is already believed to be in a technical recession — defined as two successive quarters of negative growth.

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

Economic output fell by 0.1 percent in April-June, and July-September figures slated for release next month are expected by the Bundesbank (central bank) to show another contraction.

Increasing numbers of large firms are announcing layoffs or slashing workers' hours, job creation is slowing and economic indicators point toward slowdown.

Germany is now the “problem child” of Europe, daily Süddeutsche Zeitung judged Thursday, with no other industrialized country apart from Italy slated to grow so slowly next year.

Target 'black zero'

With economic headwinds mounting, calls have grown at home and abroad for Germany to loosen the straps of its self-imposed fiscal straitjacket.

Economists, politicians and commentators are discussing whether it might be time to abandon Berlin's longstanding “black zero” policy of no new debt, allowing government to spend and stimulate growth.

International institutions like the IMF have long called on Germany to fork out more, repeating its appeal Tuesday for Berlin to deploy its financial firepower.

More such calls can be expected from a G20 finance ministers' gathering in Washington Thursday, which will likely highlight the potential benefits for Germany's partners.

“If the current economic slowdown in Germany leads to a rethink of the role of expansionary fiscal policies and reinterpreting the 'Black Zero', both the German and the eurozone economy would benefit,” said ING bank economist Carsten Brzeski.

“When, if not now, is the perfect time for investing in digital and traditional infrastructure projects given negative interest rates and high investment needs?” he asked.

So far, Chancellor Angela Merkel's government has resisted such calls, even if the finance ministry has said “Germany has the firepower for a real crisis” with stimulus and structural reform plans at the ready if needed.

For now, the government is still taking a cautious stance, highlighting that a shallow “technical” recession doesn't justify the high levels of government intervention seen during a deeper downturn.

What's more, opponents of simply throwing more money at Germany's problems note that even massive government budget surpluses raked in during the good years have not been used up.

“Please, take the money!” finance minister Olaf Scholz told municipalities, federal states and investors last month.

Scholz pointed to 15 billion available in green and infrastructure funds and subsidies he said had often been held up by slow or overly complex bureaucratic processes.

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ECONOMY

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.

READ ALSO:

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.

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