October 25, 2018 / 8:39 AM / 18 days ago

Brexit, trade tensions weigh on German economy

BERLIN (Reuters) - German business morale deteriorated slightly more than expected in October as rising trade tensions and the possibility of Britain leaving the European Union without a deal dampened confidence.

A container ship is seen at the shipping terminal Eurokai in the Port of Hamburg, Germany November 6, 2017. REUTERS/Fabian Bimmer

The Munich-based Ifo economic institute said on Thursday its business climate index fell for the second month in a row to 102.8, below a Reuters consensus forecast of 103.0.

“Firms were less satisfied with their current business situation and less optimistic about the months ahead,” said Ifo chief Clemens Fuest. “Growing global uncertainty is increasingly taking its toll on the German economy.”

Consumption and state spending have been the main growth drivers in Germany as exports weaken. The dynamic domestic economy is expected to continue propelling an upswing seen entering its 10th year in 2019.

But the risk of a no-deal Brexit, trade tensions and a lack of skilled workers are weighing on the growth outlook for Europe’s largest economy.

Ifo economist Klaus Wohlrabe said it would be difficult for Germany to meet the 0.6 percent growth forecast for the fourth quarter given by the institute in its autumn report. The institute, however, is sticking to a full-year growth forecast of 1.7 percent.

“The golden autumn for the German economy is not materializing,” Wohlrabe told Reuters, adding that pessimism was spreading in the auto industry where business expectations fell significantly, burdened by stricter emissions tests.

The government said earlier this month it expected growth to be slower in the third quarter, citing bottlenecks in the car sector stemming from the introduction of new pollution standards known as WLTP as a factor.

WEAK PHASE

The government has also lowered its economic growth forecast for this year to 1.8 percent from 2.3 percent previously. It expects the economy to expand at the same pace in both 2019 and 2020. The economy grew 2.2 percent last year.

Thomas Gitzel of VP Bank said worries about Italy’s spending plans were also clouding the outlook.

“The German economy is sliding into a weak phase,” he said. “Trade disputes, tough Brexit negotiations and concerns about Italy’s state finances are unnerving companies.”

Financial markets have reacted negatively to Italy’s expansionary budget, with bond yields rising to multi-year highs as investors fret over Rome’s defiance of EU fiscal rules and the sustainability of its debt mountain — the highest in the euro zone after Greece.

The European Commission has rejected Italy’s 2019 budget deficit target but Deputy Prime Minister Luigi Di Maio said his government would not change the plan.

Aerial view of containers at a loading terminal in the port of Hamburg, Germany August 1, 2018. REUTERS/Fabian Bimmer

Still, economists think the German economy will keep growing despite a weakening manufacturing sector and rising external risks. Low interest rates, a weak euro and planned tax cuts to help middle-income families should propel domestic demand.

“The uncertainty and the unpleasant gut feeling will continue,” Carsten Brzeski of ING Diba wrote in a research note.

“At the same time, however, the present situation of the German economy is still better than the recent stock market correction might suggest.”

Additional reporting by Joern Poltz and Riham Alkousaa; Editing by Paul Carrel and Helen Popper

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