Bundesbank's Weidmann Sees German Slowdown Lasting Into 2019

(Bloomberg) -- Bundesbank President Jens Weidmann said Germany’s economic weakness carried into 2019 and will result in significantly lower growth than predicted just a few weeks ago -- while reiterating that a temporary slowdown shouldn’t deter the European Central Bank from normalizing policy.

Even though German growth will clock in well below the economy’s potential rate of 1.5 percent this year, “there’s no reason for doom-mongering,” Weidmann said in a speech in Mannheim, Germany. “A protracted dent in output isn’t a total economic loss -- in other words: I don’t see a sudden slump, nor can I see a longer phase of noticeably declining economic activity.”

The comments come after a string of reports painted a bleak picture of the euro-area economy and its biggest members. Italy slipped into recession at the end of last year, violent protests in France weighed down consumer spending and Germany’s government cut its 2019 outlook nearly in half. ECB President Mario Draghi said last week risks to growth in the 19-nation euro region have moved to the downside, and two policy makers raised doubts over whether interest rates will rise this year.

While uncertainty for Germany’s economy remains high amid the still-unresolved trade war between the U.S. and China and the “Shakespearean drama” around the U.K.’s Brexit plans, Weidmann expressed confidence in prospects beyond 2019. December forecasts for growth of 1.6 percent in 2020 and 1.5 percent in 2021 are still realistic, he said.

Euro-area inflation, however, is likely to be “noticeably lower” this year than previously projected, he added, as oil prices have fallen. Still, over the medium term the strong labor market and the pressure on wage growth should persist. That means the ECB “should look through such fluctuations” in the headline inflation rate.

“A few people have already demanded a very slow, unassertive normalization of monetary policy,” said Weidmann, one of the front-runners to succeed Draghi when his term ends in October. “In any case, the normalization process is likely to take several years. It’s all the more important not to waste time unnecessarily. After all, monetary policy needs more room to react to an unexpected economic downturn in the future.”

In response to questions after the speech, Weidmann said that the central bank’s room for maneuver has become smaller. Fiscal policy would probably have to help in the next downturn, he said.

©2019 Bloomberg L.P.