Germany Cuts Growth Outlook as Recession Peril Mounts

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MAN SE is Reducing Manufacturing at Plants in Germany
MAN SE, Europe’s third-biggest truck maker, is reducing manufacturing at plants in Germany and Austria in response to what it said could be a drop in European industrywide deliveries of as much as 15 percent in 2014. Photographer: Krisztian Bocsi/Bloomberg

Germany cut its growth outlook and investor confidence fell to the weakest level in two years as recession concerns mount in Europe’s biggest economy.

The Economy Ministry reduced its 2014 economic-growth forecast to 1.2 percent from 1.8 percent, and its 2015 prediction to 1.3 percent from 2 percent. The ZEW Center for European Economic Research said its index of investor and analyst expectations slid to minus 3.6 in October from 6.9 in September, the 10th monthly decline and the first negative reading since November 2012.

ZEW President Clemens Fuest said he doesn’t rule out a technical recession, or two quarters of contraction, and both he and Economy Minister Sigmar Gabriel called for more investment. That might aid the European Central Bank in its battle to revive the recovery in the 18-nation euro area.

“Financial investors are turning increasingly gloomy on the prospects for the German economy,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “Holiday effects played a role for the soft monthly August data prints but underlying growth momentum has also slowed.”

The euro declined and was at $1.2652, down 0.8 percent, at 2:03 p.m. Frankfurt time. Germany’s benchmark DAX Index of stocks slid 0.5 percent, taking its drop to 12 percent since reaching a record in early July.

‘Turbulent Waters’

German gross domestic product shrank in the second quarter and factory orders, industrial output and exports plunged in August by the most since January 2009. The International Monetary Fund last week cut its growth forecasts for the euro area’s largest economy, and French Finance Minister Michel Sapin said the signs of weakness show “no country is immune.”

Wolfgang Schaeuble, his German counterpart, blamed at least part of the slowdown on global crises such as the Ukraine conflict and the effect of sanctions against Russia. At the annual meeting of the IMF and the World Bank in Washington he said “we don’t have a recession in Germany.”

Gabriel said in a statement today that while domestic demand remains intact, the German economy is in “turbulent waters” and called for the reshaping of energy systems and a rapid expansion of digital broadband services.

“Germany has to invest significantly more in its infrastructure,” he said. “For the economic dynamic, but above all for long-term growth and prosperity, investment plays a key role.”

ECB Stimulus

Fuest said the ECB’s options for adding stimulus to the currency bloc are coming to an end and German politicians should consider investment programs.

“I don’t think it would be a disaster if the government would say we invest more in infrastructure now, even if that takes it slightly below a balanced budget,” he said in Mannheim. “There’s room for more investment and now’s a good time to do it.”

The ZEW index was worse than the reading of zero forecast by economists in a Bloomberg News survey. A measure of the current situation in Germany dropped to 3.2 in October from 25.4 the previous month. A gauge of expectations for the euro area fell to 4.1 from 14.2.

ECB President Mario Draghi has called for governments to use “fiscal space” available under European Union rules to complement monetary policy. The central bank is trying to combat anemic growth and inflation in the euro area with a combination of record-low interest rates, long-term loans and asset purchases that may expand the institution’s balance sheet by as much as 1 trillion euros.

While Draghi has so far stopped short of committing to large-scale purchases of sovereign debt, more than half the economists in Bloomberg’s monthly survey predict he’ll eventually announce a quantitative-easing program similar to those carried out by the U.S. Federal Reserve and the Bank of England.

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