Dec. 7 (Bloomberg) -- The Bundesbank sliced more than 1 percentage point off its forecast for economic expansion in Germany next year after the sovereign debt crisis pushed the euro area into recession and global growth slowed.
The Bundesbank cut its 2013 projection to 0.4 percent from the 1.6 percent predicted in June and said the economy, Europe’s largest, will grow 0.7 percent this year, down from its previous forecast of 1 percent. Separately, the German Economy Ministry said industrial output fell 2.6 percent in October as investment goods production and construction activity slumped.
“With today’s industrial production data, a contraction of the economy in the fourth quarter has almost become inevitable,” said Carsten Brzeski, an economist at ING Group in Brussels. “Even a technical recession of two consecutive quarters cannot be excluded entirely. However, the German economy should be able to pick up speed relatively quickly.”
The 17-nation euro area, Germany’s largest export market, succumbed to recession in the third quarter as countries from Greece to Spain cut spending to rein in excessive deficits. Still, German business confidence unexpectedly rose in November and factory orders, an indicator for future production, surged in October on strong demand from outside the euro area.
The euro fell more than half a cent after the reports to $1.1921 at 12:43 p.m. in Frankfurt. Germany’s benchmark DAX index dropped 0.2 percent to 7517.27. The Stoxx Europe 600 Index also eased 0.2 percent to 278.30 ahead of a U.S. payrolls report later today.
Germany’s economy will shrink in the current quarter and stagnate in the first three months of next year, the Frankfurt-based Bundesbank said. It predicted growth of 1.9 percent in 2014.
“The Bundesbank isn’t as negative as the 2013 growth forecast suggests,” said Alexander Koch, an economist at Unicredit Group in Munich. “The predicted contraction in the fourth quarter has a big impact on next year’s growth rate. In fact, the forecasts suggest the Bundesbank expects a recovery from spring leading to relatively strong growth in 2014.”
“Economic prospects have clouded” as a result of “a severe adjustment recession in parts of the euro region and the slowdown of the global economy,” the Bundesbank said, adding that its forecasts are subject to a “high degree of uncertainty” and downside risks predominate. “However, there’s reasonable hope that the phase of economic weakness won’t last too long and Germany will return to growth.”
In the U.K., manufacturing production fell more than economists forecast in October, indicating weakness in the economy at the start of the fourth quarter.
Factory output dropped 1.3 percent from September, the most in four months, the Office for National Statistics said today. Economists predicted a 0.2 percent decline. Total industrial output unexpectedly fell 0.8 percent, a third consecutive decrease.
In the U.S., the Labor Department will today say nonfarm payrolls rose by 85,000 workers last month, the smallest gain since June, and that the jobless rate held at 7.9 percent, according to the median estimates in Bloomberg News surveys.
In Asia, Malaysia’s overseas sales fell for the third time in four months in October, while Taiwan’s exports in November rose 0.9 percent from a year earlier, trailing the median economist estimate for a 7.8 percent increase.
“Germany is still digesting the weakness in Asia” and “the second-round effects from the euro-area sovereign debt crisis hitting the peripheral economies,” Elga Bartsch, chief European economist at Morgan Stanley, told Maryam Nemazee on Bloomberg Television’s “The Pulse.” The country’s “phase of economic weakness could last well into next year,” she said.
The Bundesbank revised down its 2013 inflation forecast for Germany to 1.5 percent from 1.6 percent and predicted annual consumer-price gains will average 1.6 percent in 2014.
That may help to alleviate German inflation concerns and open the door for further interest-rate cuts by the European Central Bank. ECB President Mario Draghi said yesterday the euro area won’t be able to shake off its slump until the second half of next year.
It “appears probable that the economic situation in the euro area will stabilize over the course of the coming year, and that a nascent recovery will follow, if only hesitantly at first,” the Bundesbank said. “The precondition for this is that the sovereign debt and banking crises in the euro area do not further intensify and that consolidation and reform efforts continue.”
The ECB yesterday cut its economic forecasts for the euro region, predicting contractions of 0.5 percent this year and 0.3 percent in 2013 before growth of 1.2 percent in 2014.
“It is quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection,” the Bundesbank said. “In this case, the German economy, in view of its sound underlying health, may be expected to utilize the additional growth opportunities that arise.”
On the other hand, “should global economic growth remain below expectations or the sovereign debt crisis escalate further in some countries, it is probable that the German economy may follow a weaker course than the one assumed in the baseline scenario,” it said.
While Germany’s economic slowdown won’t significantly boost joblessness, employment growth can’t be expected to continue at the pace of the previous years, the Bundesbank said. It predicts the unemployment rate will rise from 6.8 percent this year to 7.2 percent in 2013 before declining again to 7 percent in 2014.
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