Wednesday 02 October 2019 12:45 pm

German think tanks once again slash growth forecast

A group of top German think tanks today slashed their growth forecasts for the European powerhouse and warned that a disorderly Brexit could knock 0.4 per cent off the country’s GDP.

The economy is now predicted to grow by just 0.5 per cent in 2019, down from a spring forecast of 0.8 per cent expansion, which was itself a downgrade from previous predictions. The think tanks also downgraded their growth prediction for 2020 to 1.1 per cent down from their April estimate of 1.8 per cent.

The institutes, among them Munich’s Ifo and Kiel’s IfW, called on the German government to move away from its balanced budget “black zero” policy and increase investment should the outlook deteriorate further.

German factories – once the biggest driver of Eurozone growth – have been hard-hit in 2019 by the US-China tariff wars damaging trade and a slowdown in China hurting demand.

“German industry is in recession, and this is now also impacting the service providers catering to those companies,” said Claus Michelsen, head of forecasting at the Institute for Economic Research (DIW).

“The fact that the economy is expanding at all is due primarily to the continuing positive spending mood of private households,” said Michelsen. He said this was “being buoyed by good wage agreements, tax breaks, and the expansion of government transfers”.

“Risks arising from an escalation of the trade war are particularly high,” Michelsen said.

“But a disorderly Brexit would also have costs: it would cause German gross domestic product, taken by itself, to be 0.4 percent lower in the coming year than if there was an orderly exit.”

The institutes said additional pension and child benefits had delivered “clear stimuli” for the economy, and said no further fiscal action was currently necessary.

Yet Nichelsen said that if growth slowed further “it would be fundamentally wrong to stick to the black zero policy”.

(Image credit: Getty)