German Industry Slump Set to Cast Shadow on Economy Through 2020

(Bloomberg) --

Germany’s worst manufacturing downturn in a decade is set to drag on economic growth at least through 2020 as domestic demand will increasingly be hurt by a weakening labor market, according to the latest projections by the country’s central bank.

The Bundesbank cut next year’s GDP forecast for Europe’s largest economy in half. While exports should start to recover in the course of the year, bolstering industrial production, consumer spending is seen slowing. The projections show momentum will pick up in the following two years.

Bundesbank President Jens Weidmann said the recovery will ultimately be carried by supportive fiscal policy and the European Central Bank’s ultra-expansionary monetary policy, but pointed to continued downside risks. “There are still external danger zones, which could aggravate and lengthen the downturn in industry,” he said.

Germany and the wider euro region have seen growth suffer amid a host of uncertainties including trade tensions between the U.S. and China, and the U.K.’s planned exit from the European Union. The forecasts offer a first glimpse of Germany’s economy in 2022 and the one that will likely be inherited by its next government, and come one day after the ECB confirmed it will maintain its accommodative stimulus stance.

ECB President Christine Lagarde, who held her first press conference in that capacity on Thursday, said downside risks have become “somewhat less pronounced.” Trade talks have shown some signs of improvement and Germany dodged a recession in the third quarter.

At the same time, data from the country’s manufacturing sector has yet to demonstrate a pickup after months of deterioration. A slump in factory orders and industrial production unexpectedly deepened in October, figures last week showed.

Inflation is seen gradually accelerating across the projection horizon, in part because of higher energy costs related to the government’s measures to fight climate change. The Bundesbank predicts consumer-price growth of 1.9% in 2022 -- the rate the ECB aims to achieve for the euro area as a whole.

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