Temporary slowdown in Germany's economic growth

• KfW Research revises economic forecasts for 2014 and 2015 downwards to 1.6% and 1.5% respectively
• Revision prompted by disappointing growth in Europe, declining sentiment among companies and weak Q2
• However, strong consumer spending continues to ensure first noticeable growth for three years in 2014

Germany's economy will grow by 1.6% in 2014 and 1.5% in 2015. KfW Research has thus made downwards revisions to its economic forecasts for this year and the next; it previously projected 2.0% for 2014 and 1.6% for 2015. The adjustment has been prompted mainly by the unsatisfactory economic performance in Europe and by declining sentiment amid the geopolitical tensions, which weigh on companies' willingness to invest, and by the fact that growth in Q2 was substantially worse than originally expected. The fact that domestic demand remains pleasing is not sufficient to offset the dampening effects in full.

"Although Germany's economy is doing well thanks to the labour market and consumer spending, it is not able to detach itself from its neighbours," explains Dr Jörg Zeuner, Chief Economist of KfW. "In 2014, gross domestic product will report a noticeable gain for the first time in three years, despite the political crisis in the Ukraine and the Middle East. However, declining sentiment among companies could end up placing a real damper on growth, which emphasises the urgent need to introduce economic policy measures that will boost growth in France and Italy," says Dr Zeuner.

The -0.2% decline in gross domestic product in Q2 was greater than expected, but has been somewhat overstated against the backdrop of the preceding very mild winter. In KfW Research's assessment, however, Germany will be able to return to solid quarter-on-quarter growth in H2. Over the long term, a more worrying aspect is the fact that the general revision of the past few years' data is showing a substantially lower momentum than previously reported. It is unlikely that Germany will be able to decouple itself from Europe now, or at any time in the future.

On the positive side, we have the reliable momentum of consumer spending and residential construction activity in Germany thanks to the labour market, the respectable recovery on important export markets such as the US and the UK, and the stable trend in China. By contrast, the unclear future relationship between the EU and Russia, and the sanctions imposed by the EU and Russia, exert a negative effect. Although the sanctions will presumably have no more than a limited impact on exports, they weigh on corporate sentiment and capital expenditure is postponed.

"Germany's economy could return to a growth course in the second half of the year, provided that the geopolitical situation eases and the eurozone as a whole can gain more traction," adds Dr Zeuner.

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