Europe's Engine

German Institutes, OECD, Slash Growth Forecasts but Still Upbeat

OECD Gurria-Reuters
OECD head Angel Gurria. The Paris-based OECD on Tuesday warned that Germany's slowdown is affecting the euro zone's recovery.
  • Why it matters

    Why it matters

    As Germany’s economy goes, so goes Europe. The OECD warned that Germany’s slowdown is a key reason for the weak recovery in the wider euro zone.

  • Facts

    Facts

    • Three major institutes slashed their German growth forecasts for this year and next, but said talk of a recession is off the mark.
    • Germany’s economy shrank by 0.2 percent in the April-June period, but institutes expect the economy grew again in the summer months.
    • The forecast is much grimmer for most other nations in the euro zone, where weak growth is unlikely to reduce high unemployment rates.
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    Audio

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The German economic powerhouse has slowed sharply this year, hit by uncertainty from the political crisis over Ukraine. The euphoria at the start of 2013 may be gone, but  talk of a recession in Europe’s largest economy is off the mark, according to major economic institutes.

The Kiel Institute for the World Economy, or IfW, last week became the first major German group to slash its forecast for growth. Economists now predict 1.4 percent growth this year and 1.9 percent in 2015. That is 0.6 percentage points lower than projections made at the start of the summer. Others followed this week. The Essen-based RWI institute slashed its own expectations by half a percentage point to 1.5 per cent this year and to 1.8 percent next year. The Paris-based OECD on Tuesday said Germany is forecast to grow by 1.5 per cent in both 2014 and 2015.

The groups have blamed a surprisingly weak first half of 2014 for their downward revision. The conflict in eastern Ukraine and the resulting sanctions against Russia have undermined export expectations and made companies more restrained in their investments. Germany’s economy actually shrank in the second quarter of the year as a result. But the reports contain a ray of sunshine.

“We expect an only subdued output expansion in the short run,” RWI said in its report, citing low interest rates and strong consumer demand as ongoing drivers of the German economy. “The economic upswing will continue and accelerate over the coming year.”

The weakening German growth is clearly affecting Europe, too. The OECD blamed the slowdown in Germany, France and Italy for a “disapppointing” recovery in the euro zone as a whole. It sees the euro zone growing at only 0.8 percent this year and 1.1 percent in 2015.

These groups likely won’t be the last to revise downward their views. Germany’s economics minister, Sigmar Gabriel, will present an updated version of the official federal government’s forecasts in October. “The basic economic tendency in Germany, in spite of the weakening in the second quarter, remains in an upward direction; in July, there were signs of a pickup,” the economics ministry has stated.

Even with a slight downward correction, the impact on the German government’s finances should be limited: Finance Minister Wolfgang Schäuble’s plans to balance the budget next year shouldn’t be affected. Spending by consumers, which is crucial for taxpayer revenues, remains intact. Only in the case of a severe economic downturn would there be a painful drop in revenues.

Talk of an imminent recession in Germany is “off the mark,” the IfW said in its report. Even though Germany’s economy shrank in the April-June months, observers predicted the economy grew again over the summer. The degree of capacity utilization – a measure of idle production at companies – is “in no way low, but currently is around its historical average,” the IfW said. Moreover, the labor market remains robust and employment has significantly increased.

france unemp2 ap
Germany’s neighbors face tougher problems. French protesters in Avignon demonstrating against high unemployment there. The sign reads: They have billions. We are millions. Source: AP

 

The Kiel Institute’s report acknowledges possible risks to the German outlook include a further escalation of the Ukraine crisis, turbulence related to a “stress test” of banks by the European Central Bank  and renewed mistrust in the financial markets because of half-hearted consolidation efforts on the part of a few euro countries.

For 2015, the Kiel researchers foresee increasing investments in Germany and they expect gross wages and salaries to rise significantly, leading to an increase in tax and social-contribution revenues for the government.

In spite of the significantly lowered forecast, Germany remains the powerhouse of the euro zone. Only a few small countries such as Latvia, Luxembourg and Malta currently show stronger growth than Germany while, according to the Kiel and OECD’s forecasts, France can expect only scant growth and Italy’s economy will again contract slightly this year.

The groups are divided on just how much of a risk low inflation poses for the euro zone economy. While the OECD warned that the risk of inflation remaning too low has increased, there has been more optimism from the institutes in Germany, a country that historically has been more fearful of high inflation than low inflation.  Kiel said the euro zone’s inflation rate is expected to rise slightly next year from 0.6 percent to 1.1 percent. Only in Greece, Portugal and Slovakia are consumer prices expected to decline slightly this year, but they will then stabilize.

This article was translated by George Frederick Takis. Jeff Borden also contributed to this story. To reach the authors: cermak@handelsblatt.com, schrinner@handelsblatt.com

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