FRANKFURT (Reuters) - The German economy is likely to stagnate in the last three months of the year as the labour 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 said there was little to suggest this would continue as demand from abroad and investment both remained weak.
"All of the key demand components therefore currently offer little reason for a noticeable short-term recovery in the German economy," the Bundesbank said in its monthly report.
In addition, it warned "political demands for new tariff barriers pose considerable additional risks for international trade", a likely reference to the protectionist stance of U.S. President-Elect Donald Trump which could hit Germany's export-oriented economy hard.
A bleak domestic picture helps explain a shift in the Bundesbank's stance inside the European Central Bank from a laser-focus on fighting inflation to a greater emphasis on stimulating growth via lower borrowing costs.
High wage growth, until recently a source of worry about a potential new leg-up in inflation, had likely peaked in the third quarter at 8.8% for collective agreements and was now likely to be "noticeably lower", the Bundesbank said.
"In view of the long-lasting economic weakness and significantly lower inflation rates, it is to be expected that the upcoming wage negotiations will result in noticeably lower agreements than in the past two years," it said.