German economy beginning to feel pinch of Europe’s debt crisis
The German economy, which long seemed immune to Europe’s debilitating debt crisis, is now feeling the pinch and growth will be hit in the fourth quarter, a panel of top economic experts said Wednesday.
This assessment was backed up by new data showing that industrial output slumped in September, as the key manufacturing sector is hit by falling demand both inside and outside Germany.
Nevertheless, growth should start picking up again during the course of next year, the so-called “Five Wise Men”, who advise the government on economic matters, wrote in their regular twice-annual report.
Unlike most of its European neighbours, Germany has been spared the worst of the long-running debt crisis thanks to deep and painful structural reforms implemented a number of years ago.
It clocked up growth of as much as 4.2 percent in 2010 and 3.0 percent in 2011.
But growth has been slowing this year. After expanding by 0.5 percent in the first quarter, the economy grew by 0.3 percent in the second quarter and growth looks set to slow again in the third quarter.
“Economic momentum in Germany is likely to reach bottom in the fourth quarter,” the Five Wise Men wrote, confirming their previous March forecast for overall gross domestic product (GDP) growth of 0.8 percent for the whole of 2012.
“The growth rate will gradually pick up again during the course of 2013. And growth will reach an annual average of 0.8 percent again next year,” the experts calculated.
That makes the Five Wise Men, whose ranks include one woman, more pessimistic than most about next year’s prospects.
While both the German government and the country’s leading economic think-tanks agree on projected growth of 0.8 percent this year, they are pencilling in slightly stronger growth of 1.0 percent for next year.
“The economic indicators up until October suggest that economic momentum will slow until the end of the year,” the panel said.
Domestic industrial demand is pointing downwards and recessionary tendencies elsewhere in the euro area were hitting exports and investment, which were in turn putting the brakes on growth.
The slowdown was clearly seen in industrial output data which showed a bigger than expected contraction of 1.8 percent in September.
A day earlier, the ministry had similarly calculated that industrial orders slumped by 3.3 percent in September as the eurozone crisis crimps both domestic and foreign demand for German-made goods.
“German industry is being hit hard by the ongoing crisis in the eurozone and waning demand in other key export markets, with official data now corroborating the survey evidence to indicate that the country is at risk of sliding back into contraction in the fourth quarter,” said Markit economist Chris Williamson.
The output data “will pour cold water on recent talk of a recovery in the eurozone’s biggest economy,” agreed Capital Economics Jonathan Loynes.
“Germany’s growth engine is still sputtering, if not in reverse. Overall, the evidence is clear that the eurozone economy has entered the final months of the year in a woefully weak state,” Loynes said.
ING Belgium economist Carsten Brzeski said the latest indicators “do not give much hope that the current downward trend will reverse any time soon.
“Today’s industrial production data send a two-fold message: on the one hand, it confirms our view that the German economy could have avoided a contraction in the third quarter. However, on the other hand, it also confirms our view of gradual stagnation. In short, the German economy is stuttering but not — yet — plunging,” Brzeski said.
Turning to the inflation outlook in Germany, the Five Wise Men forecast an average annual increase in consumer prices of 2.0 percent both this year and next year, which is more or less in line with the European Central Bank’s definition of price stability.
And the labour market will continue to hold up well, with the jobless rate expected to remain low at 6.8 percent this year and 6.9 percent next year, the panel predicted.
The outlook for Germany’s public finances was also favourable, with a small surplus equivalent to 0.1 percent of GDP slated for this year, followed by a public deficit of 0.1 percent next year.
Under eurozone rules, member states are not allowed to run up deficit ratios in excess of 3.0 percent.