FRANKFURT • The Bundesbank slashed its growth projections for Germany yesterday, saying industrial groups in the euro zone's biggest economy would suffer from weak demand through the rest of the year.
The downgrade comes as data on the same day showed industrial production and exports plunged the most in almost four years in April, highlighting the vulnerability of Europe's largest economy to headwinds from trade frictions and Brexit uncertainty.
Having been Europe's engine of growth for years, Germany is now the biggest drag on the bloc, threatening to derail the euro zone's long and protracted recovery from years of crisis as a global trade war exacerbates its troubles.
The European Central Bank (ECB) took the prospect of an interest rate hike off the table on Thursday and said it could even cut its already record rates or restart a massive asset purchase programme, given weak growth.
The Bundesbank now sees the German economy growing at just 0.6 per cent, well below the 1.6 per cent it forecast last December, and it expects growth rebounding to only 1.2 per cent next year, short of the 1.6 per cent projected earlier.
"The German economy is currently experiencing a marked cool down," the central bank said in a biannual update of its projections. "This is mainly due to the downturn in industry, where lacklustre export growth is taking a toll."
The bank also warned that while it did not expect a more protracted decline in output, risks were still skewed toward a more negative outcome than its projections.
"For economic growth and, to a lesser extent, for the rate of inflation, it is the downside risks that predominate as things stand today."
Inflation this year is still expected at 1.4 per cent but given the weak growth, its rise will be much slower than earlier thought, the bank said.
It now sees inflation next year at 1.5 per cent, below the 1.8 per cent seen in December and also well short of the ECB's target of close to but below 2 per cent.
German's industrial output declined by 1.9 per cent in April, data from the Statistics Office showed. That was the sharpest drop since August 2015 and came as factories churned out fewer investment and intermediate goods. Economists had forecast a 0.4 per cent fall.
Separate data showed exports dropping by 3.7 per cent in April, also the biggest drop since August 2015.
The German manufacturing sector has been in recession for much of this year as unresolved trade disputes between the US with both China and the European Union plus uncertainty linked to Brexit hurt exports.
The economy is also cooling because of weaker growth in the euro zone and bottlenecks in the automotive sector resulting from stricter emissions standards.
The German economy has been relying on private consumption for growth as a solid labour market and low interest rates encourage spending. This has kept the services sector humming, providing impetus for the economy.
But the slowdown in manufacturing is starting to hurt the labour market and there are concerns this weakness could spread to the services sector. German unemployment rose for the first time in nearly two years last month.
"The fall in industrial production in April adds to the evidence that Germany has not shaken off the problems which hit it nearly a year ago, and suggests that the economy slowed sharply in the second quarter of the year," Mr Andrew Kenningham of Capital Economics wrote in a note to clients.
"We don't expect a sustained improvement anytime soon."