Germany's growth forecast cut by Bundesbank

Man wanders among rolls of steel The German economy is being dragged down by the recessions in some of its southerly eurozone neighbours, the Bundesbank says

Germany's central bank, the Bundesbank, has cut its growth forecast for next year, saying the country's economy might be entering a recession.

Growth in 2013 is now expected to be just 0.4%, compared with a forecast in June of 1.6%, but is expected to bounce back to 1.9% in 2014.

Meanwhile, industrial output fell a steeper-than-expected 2.6% in October.

It comes one day after European Central Bank president Mario Draghi cut his forecast for eurozone growth.

Mr Draghi blamed his move on a stagnation in core eurozone countries, including Germany, France and the Netherlands.

Southern European countries, such as Spain and Italy, have been in recession for more than a year, but the malaise has spread to the rest of the single currency zone via weak export demand and falling consumer and business confidence.

Rebound in 2014

Meanwhile, the ECB's German counterpart warned that Germany's economy may suffer a recession during the current quarter and the first three months of next year.

The Bundesbank has cut its growth forecast for the current year as a whole to 0.7%, from 1% previously, in light of what is seen to be a very poor performance since the autumn.

Analysis

The Bundesbank's view of the economy is markedly worse than it was in the previous forecast six months ago. It still thinks Germany will avoid a recession in 2013 but it doesn't think growth will be that strong, either.

But in 2014, it forecasts that the economy will rebound to grow at nearly 2%. German economists defend that relative optimism by saying that they expect Chinese growth to pick up and that will mean rising demand for German machinery.

Chancellor Merkel's spokesman said she was "cautiously optimistic that we'll keep growing". Few expect her to lose power in the election next year. The question is, rather, with which party her CDU might form a coalition. It is possible that there will be a coalition between her centre-right CDU and the centre-left SPD.

The rogue element in economic - and political - forecasts is the eurozone. A Greek exit could derail growth - and maybe also her re-election hopes.

Industrial production data released on Friday registered a 2.6% drop in output during October, meaning that output in the month was 3.7% lower than a year earlier, with construction activity and demand for investment goods particularly badly affected.

The Netherlands also reported a 1.7% drop in its industrial output versus a year ago.

The German central bank blamed its more pessimistic growth forecasts on the recessions in neighbouring eurozone countries, as well as on a general slowdown in the world economy.

"Given the difficult economic situation in some euro area countries and widespread uncertainty, economic growth will be lower than previously assumed," the Bundesbank said.

"The Bundesbank does not see a protracted slowdown, but instead anticipates a return to a growth path soon."

It noted that German businesses were cutting their investments and were taking on fewer new workers.

The Bundesbank's president Jens Weidmann is due to give a speech in the afternoon.

'Downswing territory'

Industrial orders and exports in Germany have fallen in recent months. However, while industrial output fell in October, orders saw a surprise bounce thanks to a surge in demand from outside the eurozone.

Despite that, David Kohl, chief economist at fund managers Julius Baer, said the economy was "moving slowly into downswing territory".

Gilles Moec, Deutsche Bank: Previous growth forecasts were "unrealistic"

The biggest drag on the economy has been trade, with soft demand from southern Europe weighing on exports.

A steady rise in German house prices in recent months - driven by record low interest rates - had been encouraging a pick-up in domestic spending, but with much of that spending leaking out of the country via imports.

However, that picture appears to have been changing since the summer, with negative economic news affecting sentiment.

"Domestic demand has been a bit disappointing in the third quarter and in the current quarter," said Mr Kohl. "Uncertainty tends to hit consumer confidence. It depresses private consumption - but it lasts just for a month or two, maybe a quarter."

German unemployment - which had been falling steadily to a 20-year low of 5.4% - is showing signs of rising again.

Recent data showed German wages rising 3.3% in the third quarter of the year compared with a year earlier.

Eurozone in crisis

Promo for eurozone in crisis in graphics

Such German wage rises are seen as key to a rebalancing of the entire eurozone economy - by helping southern European workers gain their cost competitiveness, and by encouraging greater spending by German households, which should help eliminate Germany's perennial trade surplus.

'Reluctant' ECB

The weak German outlook comes a day after the ECB decided to keep interest rates on hold at 0.75%.

"The ECB had yesterday the chance to add stimulus, but seemed reluctant," noted Mr Kohl.

Many banks in the suffering southern European economies would directly benefit from a rate cut, as this would reduce the cost of the emergency loans they have received from the ECB.

The German government may also be minded to stimulate the economy, perhaps via tax cuts, as parliamentary elections are due in the second half of next year. However, any such cuts are unlikely to have an effect in time to head off the current downturn in the country's economy.

Economic data from elsewhere in Europe was similarly discouraging on Friday.

In the UK, manufacturing output fell a surprisingly sharp 1.3% in October from a month earlier, as the economy geared down from hosting the Summer Olympics.

Meanwhile, Portugal, Greece, the Czech Republic and Hungary all confirmed that their economies shrank during the third quarter of the year.

Portugal's slump was revised down from a contraction of 3.4% versus a year ago, to one of 3.5%, as exports to the rest of the eurozone suffered.

Greece's recession, by contrast, was not quite as astoundingly deep as originally feared, with the country's fall in output was revised to 6.9%, from a first estimate of 7.2%.

Outside the eurozone, the Czech economy shrank 1.3% in the third quarter, while the Hungarian economy did so by 1.5% and industrial production in the country fell 3.8% in October from a year earlier.

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