Economic activity in Germany is currently experiencing a marked slowdown. According to the Bundesbank’s latest projection, the weak underlying cyclical trend that began in the middle of last year is set to continue for the time being. This is due to the ongoing downturn in industry, which is suffering from lacklustre export business. By contrast, economic sectors with a greater domestic focus will continue to see robust growth. Despite this, real gross domestic product (GDP) is likely to decline slightly in the current quarter. The Bundesbank’s report states that “a more protracted, clear decline in economic output currently seems an unlikely prospect, though.” Instead, the economists anticipate that exports will again record stronger growth in the second half of the year, which is likely to help remedy the dichotomy in economic activity. “Once foreign demand picks up, German economic growth will be more broadly based again,” said Bundesbank President Jens Weidmann.

Global demand weaker than expected

The Bundesbank’s experts forecast economic growth of 0.6% of GDP for the current year. This represents a considerable downward revision of their expectations. In December, they had projected that the German economy would still grow by 1.6% in 2019. According to the report, this is chiefly attributable to weaker global demand, which is taking its toll on German exports and industry. For 2020 (1.2%) and 2021 (1.3%), the Bundesbank expects higher rates of growth than in the current year again. The Bundesbank’s experts write that, while private consumption remains a reliable mainstay of economic activity, its momentum is likely to be more subdued than in the years of the upswing.

Prices rise somewhat more slowly again

The Bundesbank’s experts also made projections for price developments in Germany, according to which the inflation rate, as measured by the Harmonised Index of Consumer Prices (HICP), is likely to fall from 1.9% in 2018 to 1.4% in 2019. “This is due, above all, to lower price rises for energy,” states the report. According to the projections, the rate of inflation will probably increase again in 2020 (1.5%) and 2021 (1.7%). However, the main reason for this is not energy prices, but the more steeply rising prices for other goods and services.

Developments in the euro area

This week, the Eurosystem presented its current projections for growth and inflation in the euro area as a whole. In those projections, the experts forecast growth of 1.2% in 2019 (previously 1.1%) and 1.4% in both of the following years (previously 1.6% in 2020 and 1.5% in 2021). “Despite the somewhat better than expected data for the first quarter, the most recent information indicated that global headwinds continue to weigh on the euro area’s outlook,” said ECB President Mario Draghi following the interest rate meeting in Vilnius. With regard to the rate of inflation, the ECB’s experts expect that euro area inflation will probably stand at around 1.3% in 2019. It is likely to rise to 1.4% in 2020 and to 1.6% in 2021.

Risks tilted to the downside

The Bundesbank’s experts emphasised the uncertainty involved in the latest projection. In this vein, due to the current downturn, manufacturing is likely to be susceptible to exogenous shocks, the report explains. “Additional negative external developments could intensify or prolong the downturn in Germany’s strongly export-driven economy,” it continues. This then creates the risk of the downturn being transmitted to the domestic economy. As a result, the risks to economic growth are, on the whole, tilted to the downside. In particular, the experts warn that an escalation of protectionist measures around the world could place considerable strain on German industry. In addition, they highlight the possibility of a disorderly Brexit as well as uncertainties surrounding the fiscal policy stance of the Italian government as risk factors for economic growth in Germany.

Projektion Juni 2019