Germany trims 2016 growth forecast as foreign trade drags

Berlin: Germany has lowered its growth forecast for 2016 in the face of an emerging market slowdown that is dampening exports, leaving domestic demand as the sole pillar of support for Europe`s biggest economy this year.

Presenting the government`s annual economic report, Vice Chancellor Sigmar Gabriel said on Wednesday the economy was in good shape but the government and companies alike needed to beef up investment to keep Germany competitive.

"We`re doing well in Germany, but for that to remain the case we need to invest more," Gabriel told a news conference.

In 2015, state spending rose to nearly 30 billion euros ($32.63 billion), pushing up the public sector investment ratio to 20.45 percent of GDP, slightly above the international OECD average, he noted.

Still, the government needed to speed up digitisation, do more to promote electric cars and facilitate private investment, Gabriel said, adding that Finance Minister Wolfgang Schaeuble`s goal of a balanced budget should not be seen as a dogma.

In its annual economic report, the government expects private consumption and state spending to drive economic growth by 1.7 percent this year, on a par with the 2015 performance, but below a previous forecast of 1.8 percent.

The report underlined a fundamental shift in Germany`s economy away from a reliance on exports and towards more domestic-driven growth as demand from China and other emerging markets is waning.

Berlin expects imports to rise at a faster rate than exports throughout 2016, meaning net foreign trade is likely to clip off 0.4 percentage points of economic growth. 

This is a remarkable development for an economy that for decades has relied mainly on exports to countries around the globe, led by its engineering and auto sectors.

Capital Economist analyst Jennifer McKeown said even a sharp slowdown in China would not be enough on its own to push Germany into recession. "But if, contrary to our forecasts, a slowdown in China prompted a more generalised slowdown in global demand, this would hit the German economy very hard."

The shift leaves domestic demand as the sole propellant of growth this year and probably beyond. Berlin expects a rise in consumer spending by 1.9 percent and spikes in construction investment by 2.3 percent and of state spending by 3.5 percent.

Rising real wages, rock-bottom interest rates and record-low car fuel costs due to the plunge in oil prices are giving a strong boost to consumer purchasing powers.