German Bond Yields Slump To Two-year Lows After The EU Cuts Growth Forecasts

Traditionally seen as the powerhouse of Europe, Germany's economy is starting to cause concern with uncertainties over global trade and the car manufacturing industry.

The European Commission, the EU's executive arm, revised down its growth forecasts for the country on Thursday. It's now expected to grow by 1.1 percent this year, from a previous forecast of 1.8 percent. The Commission also lowered its prospects for the euro area as a whole. The region is now set to grow 1.3 percent this year, from a previous forecast of 1.9 percent.

"In the case of Germany we see that there are certainly some short-term factors in play," Valdis Dombrovskis, vice president of the Commission, told CNBC's Willem Marx in Brussels.

"If we discuss global trade tensions, if we discuss the slowdown in emerging economies including China, it's going to affect the economies of countries which are relying on exports to a large extent, and Germany is by far the EU's largest exporting economy," he said.

"So, if there are tensions and uncertainty around trade, of course it's going to affect the exports and it's going to affect the economic growth (of Germany), so this is something that we need to watch very closely," he added.

German bond yields dropped to their lowest level in over two years after the announcement, according to Reuters.

Germany is the euro zone's largest economy. This means that any deceleration will likely be bad news for the rest of the 19-member bloc that share the euro. The Commission's expectations for German growth in 2018 were also lowered from a previous 1.7 percent to 1.5 percent. The institution said in the report that the slowdown was caused mainly by "weakening export growth and growing consumer restraint."

Recent data out of Germany have raised concerns among analysts. The German statistical office said last month that the country grew at a rate of 1.5 percent in 2018, compared to 2.2 percent in the previous year. This was its weakest growth rate in five years. German industrial production declined 0.4 percent month-on-month in December — the fourth consecutive monthly fall.

The International Monetary Fund has also warned on German growth, saying last month that new emissions rules have weighed on its large car manufacturing industry.

Also, factory orders, out on Wednesday, showed a 1.6 percent decline in December. Analysts had forecast a 0.3 percent increase. The German economy ministry said Wednesday the latest figures were pointing to a "muted momentum" at the start of 2019.

Nonetheless, some analysts are still expecting some good news out of Germany in the coming weeks. "The long-awaited strong rebound should take place in the first quarter of 2019, probably already in January 2019," Andreas Rees, chief German economist at UniCreditn said in a note out on Thursday.

He added that he expects industrial production to have picked up in January, which in turn is likely to have boosted the auto industry. As a result, Rees projected a rebound of 0.6 percent quarter-on-quarter for the first quarter of 2019.

Florian Hense, an economist at Berenberg bank, told CNBC via email that there could be some positive momentum in the spring. "While we have to brace ourselves for another weak quarter in the first quarter of 2019 — as the more timely surveys also suggest — after a grey winter, a brighter spring or summer could follow."

This is because some key risks associated with global trade and a no-deal Brexit are not in the bank's predicted scenario.

"Serious trade talks (between the U.S. and China) are under way, China looks set to augment its stimulus until it works and the U.K. still seems likely to avoid a no-deal hard Brexit. Chances are that progress on these issues will be the circuit breaker that could turn sentiment around in spring. This would herald a modest rebound in growth momentum in Germany and the euro zone," he added.