(Bloomberg) --
Germany's five leading research institutes slashed their forecasts for economic growth, as manufacturers in Europe's biggest economy struggle with waning global demand and lingering trade disputes.
Gross domestic product will expand by 1.1% in 2020, the experts predicted in their latest bi-annual outlook published Wednesday in Berlin. In April, they expected growth of 1.8%. Their report forms the basis of the government's forecasts, due to be updated around the middle of this month.
“German industry is in recession, and this is now also impacting the service providers catering to those companies,” said Claus Michelsen, DIW head of forecasting and economic policy. “The fact that the economy is expanding at all is due primarily to the continuing positive spending mood of private households.”
The weaker outlook comes as officials in Chancellor Angela Merkel's government draw up options to boost the economy. While some may never see the light of day, others are already being rolled out, according to people with direct knowledge of the plans.
Read more: German Fiscal Stimulus Already Creeping In, Whatever Merkel Says
Even after the latest downgrade, the institutes are still above the consensus for 2020. A Bloomberg survey of economists last month predicted 0.9% growth, while the OECD is even lower at 0.6%.
A disorderly Brexit is one of the main risks to the outlook, according to Wednesday's report. If Britain crashes out of the European Union without a deal, it will likely slice 0.4 of a percentage point off Germany's 2020 growth rate, the institutes predicted.
For this year, they cut their forecast to 0.5% from 0.8%, which would be the worst performance since 2013. The economy probably shrank in the third quarter, meaning Germany slipped into a technical recession after a 0.1% contraction in the April-June period, they added.
The economists were cautious to downplay the current slowdown, even if there are concerns about deeper structural issues as Germany's auto industry grapples with changing technology.
“Capacity utilization is still somewhat above the long-term average, so it's too early to talk of an economic crisis,” the institutes wrote. Their prediction for 2019 is in line with the Bloomberg survey of economists.
The five institutes are the DIW (Berlin), IWH (Halle), Ifo (Munich), IfW (Kiel) and RWI (Essen). The Zurich-based KOF institute and the IHS institute in Vienna also help draw up the forecasts.
--With assistance from Fergal O'Brien and Zoe Schneeweiss.
To contact the reporter on this story: Iain Rogers in Berlin at irogers11@bloomberg.net
To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Raymond Colitt, Chris Reiter
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