Germany has slashed its growth forecasts for this year and 2015, sparking calls for a public spending boost to prevent the eurozone falling into a triple-dip recession.
Berlin now expects growth of just 1.2% this year and the same in 2015, it said on Tuesday, down from 1.8% and 2%, in the face of slowing export growth.
It came as official Eurostat figures showed that industrial production across the eurozone slumped in August by an alarming 1.8% month-on-month, meaning it was 1.9% lower than a year ago.
With reports mounting of slowing industrial output in Germany and declining business confidence, the eurozone’s largest economy is now expected to expand at less than half the pace of the UK and US over the next year.
The economy minister, Sigmar Gabriel, blamed geopolitical tensions and global economic problems overseas. He said: “The German economy is steering through rough foreign waters. Geopolitical crises have also increased uncertainty in Germany and moderate growth is weighing on the German economy.”
An October survey showed a big fall in investor sentiment in Germany, mirroring reports through the summer months of stumbling business confidence following the erosion of previously buoyant demand for German goods.
Across the eurozone business optimism in the last three months fell from net 35% to just 5%, according to Grant Thornton’s International Business Report, dragged down by a dramatic fall in German optimism, which plummeted from a net 79% to 36% over the period.
Germany’s economy has grown consistently in recent years, giving Berlin added authority in debates over EU-imposed constraints on sovereign budgets. The finance minister, Wolfgang Schäuble, has consistently campaigned for Paris and Rome to be locked into strict budget rules.
But amid signs that the German economy is also stalling, the anti-austerity movement is gaining confidence.
Last week France’s new economy minister, Emmanuel Macron, called for a eurozone-wide €300bn (£240bn) spending boost, while the Italian prime minister, Matteo Renzi, has stepped up pressure on Brussels to adopt looser spending rules to spur investment and growth.
Their campaign has been bolstered by surveys showing Berlin’s woes may be more deep-seated.
The growth downgrades came shortly after German investor sentiment hit its lowest level since 2012, according to the ZEW Institute’s survey.
ZEW’s chief economist, Clemens Fuest, said the situation in Germany has deteriorated to such an extent that it could suffer a second quarter of contraction and fall into recession.
“It can’t be excluded that the third quarter will turn out to be negative, but I wouldn’t expect a longer recession, mainly because the domestic fundamentals in Germany are solid.”
Prices in Sweden fell by 0.4% while the Spanish consumer price index dropped by 0.2% on the year in September, compared with a 0.5% fall in August, marking the third straight monthly decline.
Schäuble dismissed fears that the German economy faced long-term decline. He said: “You can see from the forecasts that the German government expects the weakness to be temporary and that next year already, according to the available figures, it will slowly pick up.
“A growth rate of 1.2%, 1.3% is not particularly wonderful and the lowering of the forecasts compared to what we had announced is not pleasing but it’s no reason to start talking about a crisis.” Berlin aims to achieve a balanced budget with no new debt in 2015.
Gabriel said Berlin will not heed calls to abandon its much-criticised doctrine of austerity.
But many economists were unable to share Schäuble’s optimism.
Ben Brettell, a senior economist at stockbroker Hargreaves Lansdown, said: “The most severe problems in the eurozone have so far been limited to the periphery, with the core remaining in relative good health. However, in recent months we have seen a shift. Some peripheral economies are now registering decent growth, while the core looks in trouble.”
Together, Germany, France and Italy are responsible for 66% of eurozone GDP. They all contracted in the second quarter and all look like they will contract again in the third.
Brettell said: “Given the relative size of these three economies it is perfectly possible they will drag the whole bloc into recession.”
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