By Markus Wacket and Michael Nienaber
BERLIN/WASHINGTON (Reuters) – The German government is set to halve its 2019 growth forecast for Europe’s biggest economy, a government source told Reuters on Friday, reflecting a worsening slowdown led by a recession in the manufacturing sector.
The source said the government, which will update its forecast next week, now expects the economy to grow by 0.5 percent this year, lower than a recent estimate of 0.8 percent by Germany’s leading economic institutes. The government’s last forecast in January was for 1 percent growth in 2019.
In Washington on Friday, the president of Germany’s central bank Jens Weidmann said German economic growth would slow sharply this year as trade disputes and Brexit uncertainty are weighing on exports and investment activity.
The Bundesbank chief was speaking on the sidelines of the International Monetary Fund and World Bank spring meetings.
The Bundesbank predicted growth of 1.6 percent as recently as December but Weidmann said the IMF’s new projection of 0.8 percent for 2019 was entirely plausible, adding that recent data suggested that growth could even be slightly below that figure.
German Finance Minister Olaf Scholz told a joint news conference with Weidmann that the economy was losing momentum but still growing, with private consumption and state spending expected to support overall growth this year.
The government is planning income tax cuts worth 10 billion euros annually and incentives to boost corporate research and development worth 1.25 billion euros per year, Scholz said.
“Fiscal policy, as the minister said, is already expansionary in Germany and we estimate the impact of fiscal policy on GDP for this year to be between one quarter to one half percentage point,” Weidmann said.
Pointing to U.S. trade disputes and persistent uncertainty over Britain’s delayed exit from the European Union, Scholz said: “The real dangers for the economy are political uncertainties and they are man-made.”
“The man-made risks for the economy should be abolished. If we are good politicians and we work together and cooperate, this would help a lot,” he added.
The economy ministry said Germany’s export-dependent manufacturers were likely to continue feeling the bite of falling orders from abroad and that growth impetus was coming mostly from the domestic market.
The solid services and construction sectors should more than compensate for the downturn in manufacturing in the first quarter, the ministry added.
Unresolved trade disputes, Brexit uncertainty and a sluggish world economy have hit foreign demand and hurt manufacturers. A contraction in the manufacturing sector has prompted a slowdown in the broader economy after nine years of steady growth.
The government source said Economy Minister Peter Altmaier expects a growth rebound next year to 1.5 percent.
In its monthly report, his ministry described a mixed picture, with services and construction in good shape but industry “going through a weak phase” due to a global slowdown.
It said industrial activity would remain subdued even though the impact is fading of factors such as stricter pollution standards that are challenging car makers and last year’s low water crisis on the river Rhine that disrupted deliveries.
Should the slowdown in Germany worsen, pressure on the European Central Bank to provide more stimulus for the euro zone economy would grow.
(Reporting by Michael Nienaber in Washington and Markus Wacket in Berlin; Writing by Joseph Nasr; Editing by Catherine Evans)