Germany gloom as top economists slash growth forecasts
Trade wars, Brexit and car sector woes signal brink of technical recession
Germany’s top economic advisers have slashed their growth forecast for Europe’s largest economy, while warning that the country is suffering from global structural shifts, such as growing trade protectionism and digital disruption of traditional industries.
The Council of Economic Experts’ annual report, which it will submit to parliament on Wednesday, will make grim reading in Berlin. The council has cut its growth forecast for this year from 0.8 to 0.5 per cent and for next year from 1.7 to 0.9 per cent.
Adjusted for extra working days, the government-appointed council is expecting only flat growth of 0.5 per cent in the German economy next year. The report requires an official response from the government in the next few weeks.
Germany has averaged 2 per cent growth in the past five years. But its economy has slowed sharply and is now on the brink of a technical recession — defined as two consecutive quarters of contraction — after shrinking by 0.1 per cent in the three months to June.
Third-quarter gross domestic product figures for Germany are due on November 14 and many economists expect another slight shrinkage.
The export-focused economy has been hit by the US-China trade war, uncertainty over Brexit and a sharp decline in the car industry, which has been disrupted by new emissions rules and the shift to electric vehicles.
The council said the slowdown made it unwise for the government to maintain its commitment to a balanced budget approach — known as the schwarze Null, or black zero — as it could prevent Berlin from using fiscal policy to stimulate and rebalance the economy.
It concluded that it would be sufficient to maintain the separate debt brake — a more flexible rule that is anchored in Germany’s constitution and requires the federal government to keep its structural deficit at less than 0.35 per cent of GDP.
However, this issue split the council, with two of its five members writing a minority view that the constitutional debt brake should also be rewritten to give added flexibility in a downturn.
The council’s report is the latest sign of a growing backlash in Germany against the black zero commitment that was enshrined in last year’s coalition treaty between Angela Merkel’s Christian Democrats and the Social Democratic party of finance minister Olaf Scholz.
Germany has had a budget surplus since 2014 that last year reached a record of €59.2bn, or 1.7 per cent of GDP.
The council urged the government to raise infrastructure spending and cut taxes — echoing recent calls by Christine Lagarde, the new European Central Bank president, for the country to increase public sector spending.
German government investment has already been growing by 6 per cent annually for the past three years and officials say Berlin is limited in its ability to do more because of overcapacity in the construction industry and planning approval bottlenecks. But the council said Germany should make it easier for foreign construction companies to operate in the country and speed up the planning process.
The council also said Berlin should scrap the solidarity tax that it has levied on households and businesses since the country’s unification to pay for investment in the former East Germany.