By Nick Mann | 7 December 2012

Germany’s central bank has cut its growth forecasts for the country’s economy and warned that it could even enter recession in early 2013.

In its latest monthly Outlook for the German economy, the Bundesbank said it now expected Germany’s gross domestic product to increase by 0.7% in 2012, and not 1% as forecast in June, and by 0.4% in 2013, instead of 1.6%. It then forecasts an improvement to 1.9% growth in 2014.

‘In view of the difficult economic situation in parts of the euro area and widespread uncertainty, economic growth is likely to be slower than previously expected,’ the bank explained.

Raising the potential for a recession, it added: ‘There are even indications that economic activity may fall in the final quarter of 2012 and the first quarter of 2013.’

While the German economy’s ‘sound underlying health’ meant it was well positioned to take advantage of a faster-than-expected recovery in both the eurozone and global economies, downside risks predominated.

‘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,’ the outlook said.

Despite this, the Bundesbank largely endorsed the finance ministry’s assertion earlier this week that the country would balance its budget this year.

‘The general government budget looks set to be more or less balanced in the current year for the first time since the onset of the economic and financial crisis in 2008,’ it said.

But the Bank disagreed with the government’s forecast of a budget surplus in 2013 and 2014. ‘It is likely to show a marked deficit again next year in the wake of the economic slowdown. In cyclically adjusted terms, the deficit ratio in 2013 and 2014 will probably remain more or less constant at around 0.5%,’ the bank explained.