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Slowing growth creates headache for next German government

The German government will publish its latest growth forecast on Wednesday as it prepares to hand over the reins of a spluttering economy to the country's next coalition.

Global supply chain disruptions and shortages of raw materials, including plastics, metals and paper, have choked off the recovery from the impact of the coronavirus pandemic in Europe's top economy.

A scarcity of components has had a particularly hard impact on the country's manufacturing-driven economy, with production lines grinding to a halt in Germany's important automotive sector.

The official forecast is expected to be markedly lower for 2021 than it was in April, when the German government estimated the economy would grow by 3.5 percent this year.

The question of how to kickstart the economy will also be at the top of the agenda as the parties seeking to form the next German government pick up talks on Wednesday. 

In their initial agreement, the Social Democrats, Greens and Free Democrats (FDP) pledged massive investments and less red tape to prepare Germany for a greener and more digital future.

But they vowed not to introduce any tax hikes and to maintain Germany's strict debt rule, which limits deficits to 0.35 percent of GDP in normal times, a red line for the FDP.

Finding a way to deliver on both will require "creativity" by the parties' own admission, and could see the new coalition house their investment programme somewhere else, such as public lender KfW, as per one mooted solution.

Difficult climate

The new forecast comes against the backdrop of a raft of tough news.

The German Ifo institute's closely watched business climate indicator fell for the fourth consecutive month in October, according to figures published earlier this week.

In services, manufacturing and trade, the mood among businesses deteriorated -- only in construction did the sector see the situation improving.

"Supply problems are giving businesses headaches," Ifo president Clemens Fuest said in a statement, describing the bottlenecks as "sand in the wheels of the German economy". 

The increasingly pessimistic short-term outlook for the economy was a "wink" in the direction of the potential coalition partners, Jens-Oliver Niklasch, senior economist at LBBW said.

"Additional burdens for the economy are to be avoided whenever possible," was the message to take away, Niklasch said.

As supplies have dried up, costs have risen, with the prices faced by industry rising by 14.2 percent year on year in September, a rate not seen since the 1970s. 

Meanwhile, other indicators are turning downwards: German exports fell in August for the first time since April 2020, near the start of the pandemic. 

Industrial output slumped by four percent in August, too, while new orders fell 7.7 percent.  

Under pressure from "surprisingly long-lasting bottlenecks in components, raw materials and transport, more forecasts for the economy will be revised downwards," said Ulrich Kater, chief economist at Deka Bank.

Gathering clouds

Earlier in the month, Germany's leading economic institutes (DIW, Ifo, IfW, IWH and RWI) slashed their forecast for growth in 2021 to 2.4 percent, down from their earlier estimate of 3.7 percent in April.

After rapid growth in spring, the German economy has been held back by supply bottlenecks "hampering manufacturing", the institutes said in a statement.

But pandemic effects and bottlenecks would be "gradually overcome" in 2022, they predicted, pushing their outlook for 2022 up to 4.8 percent from 3.9 percent.

"It is now that much more important that a new government reduces obstacles and burdens and put the emphasis on innovation to avoid stalling the economic recovery," German Economy Minister Peter Altmaier commented on the publication.

The powerful IG Metall union made a similar plea, as it called for members to take to the streets on Friday, adding to the pressure on the next government.

The parties could "preach modernisation", said union head Joerg Hofmann, but "action has to follow quickly".

Topics: Germany , Peter Altmaier , Economy , Ulrich Kater ,
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