FRANKFURT German economic growth could slow in the third quarter, primarily due to weak manufacturing export demand, the Bundesbank said on Monday, downgrading its outlook for the euro zone's biggest economy after a slew of subdued data.
Germany, the 19-member currency bloc's economic powerhouse, has unexpectedly struggled in recent months with poor industrial output and trade figures dragging down sentiment, suggesting that the euro zone's already subdued growth expectations may still be too optimistic.
"After robust growth in the spring, Germany's economy is likely to expand somewhat more slowly in the third quarter of 2016," the central bank said in a monthly report. "This is in part reflected in the significant deterioration in corporate sentiment."
"Economic indicators at the start of the quarter have been very weak, particularly in industry," the Bundesbank said.
The warning is in stark contrast with its previous prediction that the economy would grow in line with the "robust underlying cyclical upthrust" in the quarter.
Industrial production fell the most in 23 months in July while exports unexpectedly posted their steepest drop in nearly a year, adding to evidence that manufacturing is losing momentum as overseas demand, particularly in Asia, continues to wane.
Italy, the bloc's third-biggest economy, last week said it would cut its growth forecast while France, the euro zone number two, still expects growth to rebound in the quarter after stalling in the previous three months but may struggle to meet its full-year projection.
The European Central Bank meanwhile just upgraded its 2016 euro zone growth projection to 1.7 percent from 1.6 percent, even as it highlighted ample risk to its outlook.
Still, the Bundesbank said the underlying economic trend is expected to remain strong on the back of favourable fundamentals even if near-term challenges are piling up.
With export demand waning and even private consumption showing signs of slowing, Berlin is facing calls to cut taxes and increase investment in education, infrastructure and high technology.
A federal election due next autumn also complicates life for the government as Chancellor Angela Merkel has made sound economic management in the face of repeated crises the hallmark achievement of her tenure.
The government earlier said it expected growth at 1.7 percent this year, slowing to 1.5 percent next year.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)