Why German economy suffers

The EU has cut growth forecasts for Germany for the second time this year, as trade tensions and a Chinese slowdown weigh on the traditional economic powerhouse of the region. As CNBC writes in the article EU slashes growth forecasts for Germany — again,  Germany is only expected to grow at a rate of 0.5% this year, according to the latest economic forecasts by the European Commission. It will be the second-worst economy across the EU in terms of growth, with only Italy looking more downbeat. It comes after the institution lowered Germany’s growth expectations from 1.8% to 1.1% in February.

The German economy, driven by manufacturing and exports, has been impacted by stalling growth in China, trade tensions and the introduction of new emission standards on its car industry. Data out last month showed German exports and imports dropping by more than analysts had expected.

However, the Brussels-based institution sounded optimistic about the second half of this year. “After a sharp slowdown in the second half of 2018 and early 2019, economic growth is expected to recover somewhat on the back of resilient domestic demand, the dissipation of temporary production bottlenecks and a gradual improvement in foreign demand,” the European Commission said Tuesday. “The current account surplus remains high, although declining, and the fiscal stance is expected to be moderately expansionary over the forecast period,” the Commission also said.

The forecasts suggested that Germany’s budget surplus will hit 1% this year and decline to 0.8% in 2020. Government debt is expected to fall from 58% of GDP in 2019, to 56% in 2020. As the EU’s largest economy, bad news in Germany means wider problems for the region. This, at a time when concerns over global growth are mounting.

Growth relies on domestic demand

Nonetheless, the Commission still expects growth in the whole EU to hit 1.4% this year and 1.6% next year. “As global trade and growth are expected to remain weaker this year and next compared to the brisk pace seen in 2017, economic growth in Europe will rely entirely on domestic activity,” the institution said Tuesday. “More Europeans are now in work than ever and employment growth is expected to continue, albeit at a slower pace. This, together with rising wages, muted inflation, favorable financing conditions and supportive fiscal measures in some member states, is expected to buoy domestic demand,” it said.

The European Commission foresees adverse domestic factors and economic activity outside the EU will rebound in 2020, which is set to bolster GDP rates across the 28-member bloc.

However, it warned that protectionist measures and lower growth rates worldwide, as well as Brexit, could weigh on its economic forecasts.

“There is also the risk that a rise in political uncertainty and less growth-friendly policies could result in a pull-back in private investment,” the Commission said.