German institutes slash GDP growth forecasts, warn of high downside risks

FAN Editor
FILE PHOTO: The skyline with its financial district is photographed early evening in Frankfurt
FILE PHOTO: The skyline with its financial district is photographed early evening in Frankfurt, Germany, October 8, 2018. REUTERS/Kai Pfaffenbach//File Photo

October 2, 2019

By Michael Nienaber

BERLIN (Reuters) – Germany’s leading economic institutes on Wednesday slashed their growth forecasts for Europe’s biggest economy for this year and next, blaming weaker global demand for manufacturing goods and increased business uncertainty due to trade disputes.

The revisions, which feed into the government’s own forecasts, reflect growing concerns that a slowdown in Germany, driven by a recession in the export-dependent manufacturing sector, could hamper the broader euro zone economy.

The institutes also called on Berlin to ditch its ‘black zero’ budget policy of incurring no new debt if the growth outlook should deteriorate further.

The institutes said they now expect the German economy to grow by 0.5% this year and 1.1% in 2020. This compared with their April estimates of 0.8% and 1.8% respectively.

“An economic crisis with a pronounced underutilization of the German economy is … not in sight, although the cyclical downside risks are currently high,” the institutes said, also pointing to Britain’s planned exit from the European Union.

For 2021, the institutes predict a mild recovery with economic expansion of 1.4%.

The government is due to publish its own growth forecasts later this month. In April, it predicted growth of 0.5% for 2019 and 1.5% for 2020.

The institutes said there was currently no reason for additional fiscal action, but the government should use its fiscal leeway if the economic downturn turns out to be worse than expected.

In such a scenario, the government should not be restricted by the self-imposed goal of keeping a balanced budget, the institutes said.

“It would be fundamentally wrong to stick to the ‘black zero’ policy,” said DIW economist Claus Michelsen.

Under the German debt brake rule, the federal government can take on new debt of up to 0.35% of economic output. That would be roughly 5 billion euros ($5.5 billion) in 2020 after special factors such as growth have been taken into account.

The permitted debt would rise to 8.4 billion euros in 2021 and 9.7 billion euros in 2022, according to budget experts in parliament.

German Chancellor Angela Merkel’s centre-right party on Monday vowed to stick to its policy of no new debt, despite growing pressure at home and abroad to ditch the fiscal rule.

German Finance Minister Olaf Scholz said on Wednesday that Berlin would be able to counter an economic crisis if there were one but added that he did not expect a downturn to be as bad as it was in 2008/2009.

“We are well prepared because we have decent financial resources so if there is an economic crisis, we can take countermeasures but at the moment we’re only seeing slower growth,” Scholz told public broadcaster ARD.

(Reporting by Michael Nienaber; Editing by Tassilo Hummel and Madeline Chambers)

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