MNI POLICY: Weidmann Sees Downside Risks To German Growth

By Luke Heighton

     FRANKFURT (MNI) - Growth prospects for Germany remain positive, even as

Brexit, U.S.-China trade tensions and a continued dip in car-industry production

present downside risks and look set to ensure expansion is well below potential

this year, Bundesbank chairman Jens Weidmann said Thursday.

     Here are key points from Weidmann's speech in Mannheim, in which he

insisted he saw little prospect of either a "longer phase of declining economic

activity" or "a sudden slump":

     --"Uncertainty about further economic development is high, and for Germany

the downside risks prevail. This has two main reasons," he said, referring to

the trade conflict and Brexit.

     -- "The next steps in monetary policy normalization will depend on how

inflation develops in the euro area." Weidmann said. "From today's perspective,

the drop in crude oil prices in particular will ensure that the inflation rate

is likely to be noticeably lower this year than expected by the experts of the

Eurosystem in December."

     -- Disappointing 2018 Q3 German economic data ran contrary to the

expectations of the Bundesbank, which had assumed in its December forecasts that

the auto industry would have brought its recent problems under control.

     -- German household consumption remained sluggish in the second half of

2018, despite the excellent labour market situation and rising incomes. Weidmann

said it was "hard to explain this weakness", but that it may be related to a

squeeze on disposable income caused by the sharp rise in crude oil prices

pre-December.

     -- Sentiment indicators show a significant deterioration in the business

climate, albeit expectations appear to be more negative than warranted based on

current data. However Weidmann concluded that "negative news from the German

economy could continue for a while," with the dip in growth likely to extend

into the current year.

     -- "From today's perspective, therefore, the German economy will presumably

grow well below the potential rate of 1.5% in 2019," Weidmann said. Yet: "I do

not see a sudden slump, nor can I see a longer phase of noticeably declining

economic activity." Overall growth expected to continue at a similar rate as its

capacities in 2020 and 2021, with a tightening labour market and substantial

wage increases gradually strengthening domestic inflation.

     -- The trade dispute between the U.S. and China could dampen the economic

performance of both by 0.5% in the medium term, and world trade would fall by

1%. Other economies, not least Germany's, would be harmed to a lesser extent.

     -- While the long-term consequence of Brexit would probably be substantial

income losses for the UK economy, losses for the euro area and Germany would be

much lower and manageable. Even so, were the UK to enter a deeper recession than

after the financial crisis, that would not be without consequences for Germany.

     -- The ECB's decision to end the net purchases of securities, while

confirming its intention to reinvest proceeds from maturing bonds until further

notice, keeps the total holdings of bonds constant and is crucial to the

economic impact of the program, Weidmann said. "Figuratively speaking, the

Governing Council is thus leaving the foot on the gas pedal, without pushing it

any further."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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