Bundesbank Confident in German Outlook Even as It Warns of Risks

(Bloomberg) -- Germany’s Bundesbank expressed confidence that the economy will quickly overcome its latest slowdown, even though it cautioned that growing protectionism and a disorderly Brexit pose threats to the outlook.

The central bank lowered its growth forecasts for 2018 and 2019 and also cut its inflation outlook for next year.

GDP growth 1.5% (2.0%)1.6% (1.9%)1.6% (1.6%)1.5%
Inflation1.9% (1.8%)1.4% (1.7%)1.8% (1.8%)1.8%

Output in Germany, Europe’s largest economy, contracted in the third quarter for the first time since early 2015 after car production was disrupted by new emissions tests. Since then, business confidence has eased further, hinting at a weakening in momentum.

The Bundesbank said Friday that “fairly strong” growth can be expected this quarter and next. Yet, that rebound “masks the fact that the underlying cyclical trend is likely to remain fairly subdued.”

“It is to be expected that the German economy will only grow slightly faster than its potential next year,” Bundesbank President Jens Weidmann said in a statement. “For growth -- and to a lesser extent also for inflation -- downside risks prevail from today’s perspective.”

While trade tensions between the U.S. and a range of countries eased in recent months, the Bundesbank still sees an elevated risk of growing protectionism worldwide that could perceptibly impair Germany’s export-oriented economy. It also pointed to the continued threat of a disorderly Brexit, geopolitical uncertainty and Italy’s fiscal policy.

A boost to German economic growth -- particularly in 2019 -- will come from an expansionary fiscal policy, according to the Bundesbank. It said the general government surplus could reach 2 percent of GDP this year, before diminishing considerably on the back of looser policy. The debt ratio may fall below the European Union’s 60 percent threshold as soon as this year.

©2018 Bloomberg L.P.