Germany Faces Temporary Economic Slowdown

The German economy, Europe's biggest, will not be able to escape the crisis and may even flirt briefly with recession early next year, but is well placed to rebound strongly, the Bundesbank said Friday.

The German central bank, in its latest updated twice-yearly forecasts, said there were "indications that economic activity may actually fall in the final quarter of 2012 and the first quarter of 2013."

Recession is technically defined as two consecutive quarters of negative growth and many of Germany's eurozone neighbors have been pushed into recession, in some cases deep, by the region's long-running debt crisis.

Although Germany has managed to hold up to the crisis fairly well, growth has slowed here as well since the beginning of the year.

After expanding by 0.5 percent in the first quarter of 2012, gross domestic product (GDP) grew by just 0.3 percent in the second quarter and a mere 0.2 percent in the third quarter.

"The cyclical outlook for the German economy has dimmed," the Bundesbank wrote in its December monthly report.

"However, there are sound reasons to believe that Germany will soon return to a growth path. The sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the labor market, in particular," it said.

Government spokesman Steffen Seibert, quizzed about the Bundesbank forecasts at a regular news briefing in Berlin, said "it is no secret that we're in a phase of economic cooling.

"But we have no doubt that the economy is still in growth mode," he added.

"There are a whole range of indicators which in no way point to recession. The government remains cautiously optimistic."

Taking this year and next year as a whole, GDP would expand by 0.7 percent in 2012 and then by just 0.4 percent in 2013, the Bundesbank predicted.

That represents a marked downward revision from the central bank's previous forecasts in June, when it had been penciling in growth of 1.0 percent for 2012 and 1.6 percent for 2013.

It also gave its first estimation for growth in 2014, when the economy is forecast to expand by 1.9 percent.

The Bundesbank cautioned that its projections were "characterized by a high degree of uncertainty.

"It is quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection," it said.

"Downside risks nonetheless predominate," it added.

"Should global economic growth remain below expectations or the sovereign debt crisis escalate further in some countries, it is probable that the German economy may follow a weaker course than the one assumed in the baseline scenario," it said.

The day before, the European Central Bank unveiled its own set of -- rather gloomy -- economic forecasts for all 17 countries that share the euro.

In its regular quarterly staff economic projections, the ECB forecast that the eurozone economy will contract both this year and next year and only return to growth in 2014.

ECB chief Mario Draghi argued that the central bank's policy of low interest rates -- it held them at their historical low of 0.75 percent on Thursday -- would help fuel recovery.

The Bundesbank, too, believed the "exceptionally favorable financing conditions" would benefit businesses' investment plans.

Turning to unemployment, the Bundesbank said it expected the labor market to "come through the economic slowdown in good shape."

The jobless rate, projected to reach a low of 6.8 percent this year, would edge up to 7.2 percent in 2013 and then fall back to 7.0 percent in 2014, it said.

Inflation, too, would remain contained, easing from an anticipated 2.1 percent year this to 1.5 percent next year and 1.6 percent in the following year.

The ECB defines price stability as inflation rates just below 2.0 percent.