German Economy Stagnation Ahead

FRANKFURT (Reuters) – The German economy is likely to stagnate in the last three months of the year as the labor market continues to soften and possible new trade tariffs loom, the country's central bank said on Tuesday.

Europe's largest economy unexpectedly grew, albeit only by 0.2%, in the three months to September, but the Bundesbank stated there was little to suggest this growth would continue as demand from abroad and investment both remained weak.

> "All of the key demand components currently offer little reason for a noticeable short-term recovery in the German economy," the Bundesbank said in its monthly report.

Additionally, it warned that "political demands for new tariff barriers pose considerable additional risks for international trade," likely referencing U.S. President-Elect Donald Trump's protectionist stance, which could severely impact Germany's export-oriented economy.

A bleak domestic situation helps explain a shift in the Bundesbank's approach within the European Central Bank from a strict focus on fighting inflation to a greater emphasis on stimulating growth through lower borrowing costs.

High wage growth, which had previously raised concerns about a possible new surge in inflation, likely peaked in the third quarter at 8.8% for collective agreements and is expected to be "noticeably lower" now, according to the Bundesbank.

> "In view of the long-lasting economic weakness and significantly lower inflation rates, it is anticipated that upcoming wage negotiations will yield noticeably lower agreements than in the past two years," it concluded.