First came factory orders and industrial output. Then came a pessimistic German business confidence survey. And now, the official forecasts of the German government are finally adjusted to the downside, and quite sharply.
For this year, the economy ministry expects a growth rate of only 1.2%, a third lower than 1.8% previously forecast. For 2015, the cut is similar and certainly isn’t optimistic: 1.3% instead of 2%. But is it still too optimistic? Is the German government denying a danger of a recession the same way that they deny the danger of deflation in the euro-zone?
After the German economy contracted in Q2, this was shrugged off as a one off. As worries about Germany slipping into recession mount, the government has lowered forecasts, but hasn’t acknowledged the danger of recession. GDP data is released on November 14th and it will be very interesting to watch.
Despite these significant cuts, the forecasts still seem optimistic, also when looking at inflation: this is expected to hit 1.1% in 2014. The current level is 0.8% and despite the fall of the euro, prices haven’t really picked up. With some stabilization in the euro and falling oil prices, the 1.1% forecasts seems optimistic. Sub 1% inflation for this year seems far more realistic.
What’s behind the economic slowdown? The crisis in Ukraine is cited, even though its fading away and Russia has recently announced a retreat in its military deployment along the border.
A bigger reason is the general slowdown in Europe: Germany depends on its euro-zone peers the same as they depend on Germany. Germany cannot run forward on its own for too long. Eventually it’s being dragged down and can now lead in the slowdown.
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