Economic activity in Germany has slowed down significantly, and economic growth in 2019 may lag far behind potential output growth of 1.5%. Speaking on the sidelines of the spring meeting of the International Monetary Fund (IMF) and the World Bank in Washington, Bundesbank President Jens Weidmann pointed to the IMF projections that predict a 0.8% rise in Germany’s gross domestic product (GDP) in 2019: “Given the way the indicators look at present, slightly weaker growth is also plausible.”

No general improvement in the cyclical position so far

According to Mr Weidmann, economic activity in Germany slowed down significantly in the second half of 2018, and so far there are no signs of any general improvement this year. He cited production problems in the automotive industry as well as diminished exports and private consumption as reasons for this. “However, we still expect private consumption, in particular, to recover from its weakened state and support economic growth,” said Mr Weidmann, adding that the retail sector recorded gains in the first few months of the year and motor vehicle registrations by households had also rebounded.

In Mr Weidmann’s view, the most probable scenario is what is known as a “soft patch”. This is a term used by experts to describe a period of temporary slowdown in which the economy does not slide into recession. Germany’s economy is thus expected to pick up again after stopping for a pause, remarked Mr Weidmann, even though economic growth in 2019 will lag far behind potential output growth.

Downside risks for the German economy

Mr Weidmann warned that the threat of a disorderly Brexit has not yet been averted. In his view, chief among the risks arising in this respect are the possible implications for the real economy, as extensive safeguards have already been put in place in the financial markets. “I hope that the extra time agreed on Wednesday will now also be used to prevent a hard Brexit,” said the Bundesbank President. In addition to Brexit, he cited international trade conflict as a major downside risk to Germany’s economic growth.

With regard to monetary policy in the Eurosystem, the Bundesbank President emphasised that the recent decisions made by the ECB Governing Council mean only that the process of normalisation has been put off, not called off. He conceded that, because of weaker growth, inflation will not firm up as quickly as had been expected at the end of 2018. In light of this, the Governing Council took two steps in March, adjusting its forward guidance on the expected date of a possible first interest rate increase and also announcing the introduction of new long-term refinancing operations.