BERLIN: Germany’s government is poised to cut its prediction for Europe’s biggest economy and now expects no expansion at all this year, according to people familiar with the matter.
Officials in Berlin are set to cut their forecast for growth in 2024 to – at best – stagnation, down from 0.3% previously projected, said the people, who declined to be identified because the predictions remain confidential for now.
Such an outcome would mean yet another lost year for an economy that has been weighed down by the weakness of its industrial sector amid the shutdown in gas supply after the invasion of Ukraine, as well as feeble Chinese demand and its struggle to pivot to electric vehicle production.
The prospect of no growth is an effective admission of defeat by the coalition government and another blow to the record of Chancellor Olaf Scholz, who hasn’t seen the economy grow for two consecutive quarters since taking office in December 2021.
With an election now less than a year away, it also narrows the window perilously for him to achieve any meaningful pickup before going to voters, whose discontent has already made itself known this year in ballots for the European Parliament and in eastern states.
German bonds held losses after the report. The two-year yield traded three basis points higher on the day at 2.1%, near the lowest level since 2022.
The notes have rallied sharply over the past week as the market prepares for the European Central Bank to cut interest rates again in October.
Traders now see a roughly 80% chance of a quarter-point reduction next month, swiftly off the back of a move in September as signs keep mounting that the eurozone economy is slowing.
The government’s final estimate for 2024 might come in even weaker than zero growth for Germany depending on industrial orders and output data due shortly before the release of its updated forecast for gross domestic product (GDP) on Oct 9.
Economy Ministry officials are currently working on the new projection, which could still change before its final release.
No expansion, if that can be achieved, would still exceed the result of a 0.1% contraction anticipated by the nation’s leading economic institutes in the past week.
A load of bad news – from Volkswagen AG’s threat to close factories in Germany to Intel Corp’s decision to postpone a €30bil (US$33.5bil) investment decision for a new chip plant in the country’s east – underlines the additional headwinds bearing down on the economy.
Together with weak demand from China and the risk of Donald Trump returning to the White House, Germany is heading towards a perfect storm that could depress GDP even further, one of the people said.
Weaker growth prospects would dent tax revenues, which could further complicate efforts in Scholz’s ruling coalition to close a budget gap in the 2025 finance plan.
However, it would also allow more net new borrowing – roughly an additional €2bil – under a debt rule that allows the government to take on more debt in economic difficult times, the people said.
A spokesperson for the Economy Ministry didn’t immediately respond to requests for comment. — Bloomberg
