German economic growth to be hit by Ukraine crisis, Ifo head says

By Erik Kirschbaum

BERLIN (Reuters) – German economic growth will shrink towards zero in the second quarter due to the Ukraine crisis and the tough new economic sanctions imposed on Russia from 0.8 percent in the first quarter, the head of Germany’s Ifo institute said on Saturday.

Ifo president Hans-Werner Sinn wrote a guest column for Wirtschaftswoche magazine in which he said the worsening crisis meant forecasts that Europe’s largest economy would expand by 0.3 percent in the second quarter have to be revised down.

“It looks like there will be a longer break in the economic upturn that began in the second half of last year and continued through the winter months,” wrote Sinn, one of Germany’s most high profile economists.

“The growth forecast that Ifo presented last month will likely have to be revised downward. The assumption that the second quarter will have had grown 0.3 percent from the first quarter can no longer be held onto. It’s more likely that there was zero growth in the second quarter,” Sinn wrote.

The European Union and the United States announced further sanctions against Russia last week that targeted its energy, banking and defence sectors in the strongest international action yet over Moscow’s support for rebels in eastern Ukraine.

Before the downing of Malaysian flight MH17 over rebel-held territory in eastern Ukraine by what Western countries say was a Russia-supplied missile, German industry had campaigned hard and effectively against imposing tougher sanctions against Russia.

They had long tried to dissuade Chancellor Angela Merkel from imposing tougher sanctions on Russia, warning of lasting damage to domestic companies and the broader economy.

German exports to Russia nevertheless dropped by 14 percent to about 10 billion euros in the first four months of 2014, according to data from the Statistics Office.

German business leaders had said a decline in German-Russian trade was putting some 25,000 jobs in Germany at risk. Some 300,000 German jobs are dependent on trade with Russia, the Committee on Eastern European Economic Relations says.

Sinn added growth forecasts for the third quarter will also have to be changed due to the Ukraine crisis and sanctions.

“The forecast growth for the third quarter of 0.4 percent will likely have to be revised down. That will significantly reduce the annual growth forecasts for 2014 and 2015.”

Germany’s economy grew by 0.8 percent in the first quarter – its fastest rate in three years – on the back of an unusually mild winter. Growth was expected to slow in the second quarter.

The federal statistics office will publish its first estimate of second quarter growth on Aug. 18.

The Bundesbank raised its 2014 growth forecast by 0.2 percentage points to 1.9 percent on June 6 and kept its 2015 estimate at 2.0 percent.

In its monthly report on July 21, the Bundesbank said the German economy probably stagnated in the second quarter as industry shifted down a gear in the face of geopolitical concerns.

(Reporting By Erik Kirschbaum, editing by David Evans)

German economic growth to be hit by Ukraine crisis, Ifo head says