German economy ‘stuck’ in weak phase, crisis unlikely

Govt to tap all fiscal options in case of economic crisis: Scholz

BERLIN, Oct 17, (RTRS): The German economy is unlikely to slide into a prolonged recession even as it languishes in a weak growth cycle, the Economy Ministry said.

The German economy is expected to contract slightly in the third quarter as it did in the April-June period as exports weaken on uncertainties linked to Britain’s planned departure from the European Union as well as trade conflicts.

The technical recession expected in the third quarter will come after nine successive years of growth, fuelled by an export boom mainly to China and more recently a consumption-driven cycle supported by low interest rates in the euro zone.

“A stronger slowdown or a pronounced recession are not to be expected at the moment,” the ministry said. “The exportoriented German industry is facing weak global trade, stagnating global manufacturing and falling demand for cars.”

“The German economy remains in stagnation,” it added. “Economic activity is stuck at the existing level.”

Economists have voiced concern that the slowdown in manufacturing would sooner or later spread to other sectors of Europe’s biggest economy, whose robust labour market is starting to feel the effects of the drag.

The ministry said that growth in services and construction was largely compensating for a recession in the export-dependent manufacturing sector.

Chancellor Angela Merkel’s coalition government of conservatives and social democrats has resisted calls for a stimulus package to counter the slowdown.

Germany’s leading economic institutes have slashed their growth forecasts, predicting an expansion of 0.5% this year and 1.1% in 2020.

The government will publish its growth forecasts this week. In April, it predicted growth of 0.5% for 2019 and 1.5% for 2020.

Germany intends to stick to its balanced budget rules for now and boost spending without incurring new debt, Finance Minister Olaf Scholz told Reuters on Tuesday, adding that the government would use all fiscal options in a severe economic crisis.

Scholz’s remarks that Germany would loosen the purse strings to fight any downward economic spiral came days before world financial leaders meet in Washington to discuss how best to counter a slowing world economy.

Leading economic institutes earlier this month called on Merkel’s government to ditch its budget policy of incurring no new debt if the growth outlook deteriorates.

Asked about this recommendation, Scholz told Reuters in an interview that Germany was experiencing a phase of economic weakness caused by trade disputes, Brexit uncertainty and other political risks, such as Turkey’s invasion of northeastern Syria. But he insisted there was no economic crisis right now.

“We have a federal budget that works without new debt. Our massive investments and expansionary fiscal policies of recent years have worked without new debt – and will do so for the time to come,” Scholz said.

“But of course in case of an economic crisis, which so far is not emerging, we have all fiscal options on the table,” Scholz said, suggesting that Germany’s mantra of no new debt to finance a fiscal stimulus package was not set in stone.

The German government will lower its 2020 forecast for economic growth to 1.0% from an earlier estimate of 1.5%, a source familiar with the projection told Reuters on Tuesday.

Under the German debt brake rule, the federal government can take on new debt of up to 0.35% of economic output. That would be roughly 5 billion euros ($5.5 billion) in 2020 after special factors such as growth and the outflow of earmarked money from specialpurpose funds have been taken into account.

The permitted debt would rise to 8.4 billion euros in 2021 and 9.7 billion euros in 2022, according to budget experts.