The Bundesbank yesterday slashed its growth forecasts for Germany both this year and next year, but insisted the underlying health of Europe’s top economy meant the downturn will only be temporary.
In its monthly report this month, the German central bank predicted the economy would grow by 0.7 percent this year and then by only 0.4 percent next year, before expanding again by 1.9 percent in 2014.
In its previous forecasts published in June, the Bundesbank had been penciling in GDP growth of 1 percent for this year and 1.6 percent for next year.
“The cyclical outlook for the German economy has dimmed,” the central bank wrote.
“There are even indications that economy activity may actually fall in the final quarter of 2012 and the first quarter of 2013,” it said, blaming the anticipated contraction on recessions in some of its eurozone neighbors and the slowing global economy.
“However, there are sound reasons to believe that Germany will soon return to a growth path,” the report said.
“The sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the labor market, in particular,” it said.
Meanwhile, the euro plunged on Thursday after the European Central Bank (ECB) sharply cut its eurozone growth forecast for next year while also revealing that its decision to leave its key interest rate unchanged was not unanimous.
As widely expected, the ECB’s decision-making governing council voted to leave the bank’s main refinancing rate at a historic low of 0.75 percent at its last policy meeting this year.
However, ECB President Mario Draghi — who last month had said further rate cuts were not discussed at all — revealed there had been “wide discussion” of such a move this time round and the decision was anything but unanimous.
Nevertheless, “in the end the prevailing consensus was to leave the rates unchanged,” the Italian central banker said.
In its regular quarterly staff economic projections, the ECB forecast that the eurozone economy will contract both this year and next year and only return to growth in 2014.
According to the updated forecasts, the euro area economy is set to shrink by 0.5 percent this year rather than by 0.4 percent as predicted earlier.
It would shrink again by 0.3 percent next year, instead of growing by 0.5 percent.
Only in 2014 would the economy grow again, by an estimated 1.2 percent, the forecasts said.
The ECB governing council “continues to see downside risks to the economic outlook for the euro area,” Draghi said.
“Over the shorter term, weak activity is expected to extend into next year,” he said,
Nevertheless, a gradual recovery should start “later” next year as the ECB’s low interest rate policy and rising market confidence fed through into household spending, while a strengthening of foreign demand should support export growth, he said.
“In order to sustain confidence, it is essential for governments to reduce further both fiscal and structural imbalances and to proceed with financial sector restructuring,” he added.