Germany, France central banks cut growth forecasts

[BERLIN] Germany will grow at a slightly slower pace than previously expected, its powerful central bank predicted Friday, cutting its forecasts for Europe's top economy.

The central bank of neighbouring France also turned more pessimistic on the growth outlook for the eurozone's second-biggest economy.

The Bundesbank said the powerhouse German economy would expand by 1.7 per cent this year, slowing to 1.4 per cent in 2017.

This was a downgrade of previous forecasts of 1.8 per cent and 1.7 per cent respectively.

Nevertheless, the bank's head, Jens Weidmann, said the German economy stood on a "relatively firm" footing.

The bank said it expected the economy to grow by 1.8 per cent in 2018.

Exports, long the bedrock of the German economy, are only providing a "limited" push but "should pick up" in coming years, Weidmann predicted.

The latest forecast brings the central bank into line with the German government's 2016 forecast, which is slightly more optimistic than the International Monetary Fund with a 1.5 per cent growth estimate and German economics institutes which expect 1.6 per cent.

Inflation is expected to remain subdued this year, the Bundesbank said, with consumer prices rising by just 0.2 per cent, accelerating to 1.5 per cent next year and 1.7 per cent in 2018.

The Bank of France also reiterated its earlier 1.4-per cent French growth forecast for this year, but cut its outlook for 2017 to 1.5 per cent from 1.6 per cent earlier. Growth of 1.6 per cent would now only be achieved in 2018, it said.

The central bank said the international environment had become "less favourable" for French growth, and also cited expectations of higher oil prices as a negative factor for expansion.

France's trade deficit, partly explained by a strong euro, was also weighing on gross domestic product (GDP), it said.

Limited growth was expected to lead to an equally limited increase in jobs, with employment levels likely to rise by 0.7 this year and 0.6 per cent next year, the Bank of France said.

The French unemployment rate, a key focus for President Francois Hollande's government, will ease to 10.1 per cent this year from 10.3 per cent in 2015, and fall below 10 per cent only in 2018, the Bank of France predicted.

The bank also called on the government to control its deficits with the aim of cutting debt, which stands at 96 per cent of GDP, vastly higher than the eurozone's 60-per cent target.

Mr Hollande's government has promised to reduce the public sector deficit to 3.3 per cent this year before bringing it below the eurozone's three-per cent limit in 2017, to 2.7 per cent.

Meanwhile, Eurogroup chief Jeroen Dijsselbloem criticised the EU Commission for being too lenient on France concerning fiscal rules, in remarks published Friday.

"If the commission is only strict with smaller countries and unable to be strict on larger countries, that would be devastating for the confidence we have in our cooperation," he said in an interview with several European newspapers, including Britain's The Guardian.

He was referring to reported remarks by commission head Jean-Claude Juncker that France won a two-year reprieve on deficit targets "because it is France", while smaller countries have been under much more pressure.

"You have to be a little careful if it is in your advantage that the commission turns a blind eye ... In the end, if we turn a blind eye everywhere, we make a blind monetary union," Mr Dijsselbloem said.

Asked about the comments Friday, EU Commission spokesman Margaritis Schinas acknowledged that the EU exercises "political discretion" in its dealings with governments over deficits, but said the size of a country did not matter.

"The president (Juncker) was very clear on many occasions that in applying the rules, the commission makes no difference whatsoever between small and big member states, something that is quite obvious for a former prime minister of Luxembourg," he told a news briefing.

AFP