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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
-- 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
--MNI Frankfurt Bureau; +49-69-720-146; email: email@example.com
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