EU CRISIS: German economy 'at LONG-TERM RISK' from Brexit and Italy-EU budget row

Brexit negotiations have gripped the eurozone over the last few months as the UK and Brussels struggle to reach an agreement, with traders keeping an eye on what leaving the EU means for their money.

EU divorce talks have been a key influencer for the pound, as Sterling keeps traders on their toes by continuing to tumble and regain ground against the euro.

Meanwhile, the euro has been left rattle by an ongoing war of words between Italy and Brussels over Rome’s recently announced budget plans.

Italy’s financial statement left EU chiefs furious after it included a deficit budget of 2.4 percent of GDP – three times the previous administration’s target.

Christoph Schmidt, an economist and president of the RWI Essen (the RWI-Leibniz Institute for Economic Research) told CNBC these external factors will have an impact on the German economy.

Earlier this month, German government advisers slashed the economic growth forecast for this year, blaming tougher foreign trade environment.

Growth is predicted at 1.6 percent this year, down sharply from the 2.3 percent forecast back in March.

In their report, they cited the downgrade as being down to “a less favourable foreign trade environment, temporary production issues and capacity bottlenecks are slowing the pace of expansion”.

And according to data published earlier this month from German statistics agency Destatis, German exports took a hit at the end of the third quarter, contracting 0.8 per cent and missing expectations of a 0.3 per cent rise.

Mr Schmidt said: “It’s a unique quarter, I think.

“The German economy will bounce back and we think it will grow according to potential, roughly 1.6 percent this year and 1.5 percent in 2019, so this temporary blip will be overcome.

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“But there’s not enough potential to grow stronger than potential now, so it will be a one-off loss.

“In an international environment, the trade conflicts, the upcoming Brexit (in March 2019), possible problems in the euro area (posed by Italy), these are elements of the international environment that are disturbing and disconcerting in the domestic realm.”

However, it was not all bad news for Germany as gross domestic product grew 2.2 percent last year, the strongest performance in six years.

Third-quarter GDP data is due tomorrow, with analysts warning there will be no “speedy recovery” for the economy.

The ZEW economic sentiment gauge for Germany improved slightly in October after falling to the lowest level since September 2016.

Achim Wambach, president of the ZEW think-tank, said: “The figures for industrial production, retail sales and foreign trade in Germany all point towards a weak development of the German economy in the third quarter… 

“At the moment, [survey participants] do not expect to see a speedy recovery of the currently weak development of the economy.”


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