Cloudy Outlook

Buffeted by International Conflicts, German Growth Seen Under Threat

The German central bank Bundesbank's forecast looks cloudy. Source DPA
The German central bank Bundesbank's forecast looks cloudy.
  • Why it matters

    Why it matters

    Germany’s economy is heavily dependent on exports, making it especially susceptible to global political uncertainty.

  • Facts

    Facts

    • The Bundesbank had previously expected robust growth in the second half of 2014.
    • The German economy shrank 0.2 percent in the second quarter of 2014.
    • But domestic demand continues to prop up the country’s prospects.
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    Audio

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The Bundesbank in Frankfurt said on Monday that it was revising its previously optimistic forecast for robust growth in the second half of the year amid mounting political uncertainty around the globe.

“The economic outlook for the German economy has deteriorated after the first half of the year due to the increase in unfavorable international news,” the Bundesbank wrote in its monthly report for August.

The German monetary authorities added: “The expectation based on predictions made early in the year that the cyclical underlying trend would further solidify in the second half of 2014 is being called into question because of the current indicators.”

The skepticism followed the bad news last week that Germany’s gross domestic product shrank 0.2 percent in the second quarter in comparison with the first three months of 2014.

However, like many economists, the German central bankers also pointed out that the unexpected contraction was “largely attributable to the technical counter-reaction as a result of the strong weather-related rise in production in the first quarter.”

“Sanctions against Russia and the West's response will eventually have an effect on foreign trade.”

The Bundesbank

And absent these weather conditions, the Bundesbank estimated that the German economy would likely have grown on average 0.25 percent in the first and second quarters of this year.

According to Bundesbank economists, factors arguing “against an economic reversal” included that sentiment is still at relatively high levels and domestic demand has generally remained buoyant.

But the German monetary authorities are nevertheless concerned about the country’s export-led economy. Exports posted only meager growth in the second quarter, and in light of current global instability, that trend is expected to continue.

“The policy of strengthening sanctions against Russia and the responses taken by the government there will eventually have an effect on foreign trade,” the Bundesbank economists wrote Monday.

The geopolitical tension in eastern Europe related to the conflict in Ukraine and in other parts of the world appear to have further strained business confidence.

And the Bundesbank economists are now also more pessimistic about the prospects for the euro zone than they have been recently. After the stagnation in the second quarter, they expect that the macroeconomic upward trend will pick up again, but will likely not reach the “tempo widely predicted in the spring.”

This article was translated by Mary Beth Warner. To contact the author: hess@handelsblatt.com

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