Germany concerned over impact of global trade war on economic growth

The German government has cut its forecasts for growth this year and next in Europe's largest economy and sees an escalation in the global trade dispute as for the main risk for the future, a document was seen by Reuters on Wednesday showed.

The government - due to present its updated forecasts on Thursday - slashed its 2018 and 2019 growth forecasts to 1.8 per cent, compared with its previous predictions of 2.3 per cent and 2.1 per cent respectively, the document showed.

It blamed weak global trade, reduced state consumption, revisions to previously reported data and slower production in the auto sector due to difficulties adjusting to a new pollution standard.

Risks for the German economy include Britain's looming departure from the European Union and the threat of economic crises in Turkey and Argentina spreading to other emerging economies, the document showed.

The German government expects the economy to expand by 1.8 per cent in 2020, the document showed.

It said domestic demand remained strong but that the global economic environment was increasingly difficult.

Traditionally driven by exports, the German economy - now in its ninth year of expansion - relies heavily on household spending to grow as consumers enjoy record-high employment, rising real wages, strong job security and low borrowing costs.

Due to an increasingly tight labour market, characterized by low unemployment and more than a million job vacancies, the government expects nominal wages to rise by 3.0 per cent this year and by 3.1 per cent in both 2019 and 2020.

With inflation, predicted to rise to 1.9 per cent this year and 2.0 per cent in 2019, the wage hikes mean that German consumers will have more money to spend also in real terms.

"In view of the strong expansion of disposable income and moderate inflation, private consumption is likely to pick up noticeably," the document said.

Household spending is projected to grow by 1.6 per cent in 2018 and by 2.0 per cent in 2019.

Provisional budgeting in the first half of this year caused by an unusually long coalition building period means that state spending will be postponed into next year, it said.

State consumption is projected to rise by 1.4 per cent this year and by 2.5 per cent next while state investments are seen jumping by 5.9 per cent in 2018 and by 5.2 per cent in 2019.

(With inputs from agencies.)