FRANKFURT (Reuters) - Germany’s economic slump will be longer than earlier thought and there is more bad news in the pipeline, Bundesbank President Jens Weidmann said on Thursday, presenting an unusually gloomy outlook for Europe’s biggest economy.
The euro zone is also likely to undershoot its inflation projection this year due to lower oil prices but the European Central Bank should look through this dip and not waste time unnecessarily in normalizing policy, Weidmann said.
With German growth stalling unexpectedly, the ECB is seen giving up for now on plans to normalise policy any further and it is more likely to provide further stimulus, rather than less, economists say.
“Contrary to our forecast from December, the dip in growth is likely to extend into the current year,” said Weidmann, an outspoken hawk, who is also seen as a candidate to replace ECB President Mario Draghi later this year.
“From today’s perspective, therefore, the German economy will probably grow well below the potential rate of 1.5 percent in 2019,” Weidmann said in a speech in Mannheim. “Bad news from the German economy could keep coming for a while.”
The ECB downgraded its growth outlook last week on weak trade and waning confidence but maintained its view that the dip was temporary and it kept an interest rate hike for late this year on the table.
In a similar vein, Weidmann also stuck to the Bundesbank’s longstanding view that growth will rebound, arguing that 2020 and 2021 forecasts remain valid as the slowdown is not a downturn.
“However, uncertainty about further economic development is high and for Germany the downside risks prevail,” he said.
For the euro zone, Weidmann also had a gloomy message, arguing that this year’s inflation projection will need to be cut.
“From today’s perspective, the drop in crude oil prices in particular will results in inflation probably coming in noticeably lower this year than expected by the (ECB) in December,” he said.
Still, he said the ECB should look past inflation volatility caused by oil prices and not waste time unnecessarily in normalising policy as the process is likely to take years.
“After all, monetary policy needs more room again to react to an unexpected economic downturn in the future,” he said.
The ECB projects inflation of 1.6 percent this year. Its forecasts are up for review in March.
It is expected to offer banks more long term loans to maintain the flow of credit and could also formally revise its interest rate guidance, pushing out the timing of any rate hike.
Reporting by Balazs Koranyi; Additional reporting by Michelle Martin in Berlin; Editing by Hugh Lawson