Two years after expanding at its fastest rate since reunification, Germany's economic growth is seen at just 1 per cent next year, finally hit by the euro zone crisis that has hammered most of its partners.
The government chopped its 2013 growth forecast on Wednesday to 1 per cent, down from a 1.6 per cent forecast in April. For this year, the economy ministry expects growth of 0.8 per cent, up from 0.7 per cent in April.
Germany's economy powered through the first two years of the euro zone's sovereign debt crisis, posting 4.2 per cent growth in 2010 and 3 per cent last year at a time when some peers were seeking bailouts and others were grinding to a halt.
Its export strength saved the currency bloc from falling into recession up until the second half of this year.
But uncertainty about policy makers' ability to curtail the crisis has resulted in companies postponing investment, and turmoil in Germany's main trading partners could weigh on exports in the second half of the year, the ministry said.
"The good news is Germany is standing its ground despite all global economic turmoil and remains on track for growth," Economy Minister Philipp Roesler said.
"But Germany is navigating stormy waters because of the European sovereign debt crisis and an economic weakening in emerging nations in Asia and Latin America."
German companies are feeling the pinch. Deutsche Telekom may have to cut more jobs as a slide in revenues in Europe cuts into its profits and truck maker MAN SE expects third-quarter orders to fall below those in the second quarter.
MAN, which also makes diesel engines and turbo machinery, also said it was bracing for a "tough" year in 2013.
However, after years of wage restraint and job market reforms, Germany is benefiting from a healthy labour market and employees' wallets may not actually shrink.
Real wages should rise by 2.8 per cent this year and 2.6 per cent next year, outpacing inflation forecast at 2.0 and 1.9 per cent respectively and Mr. Roesler said private consumption, long subdued, would continue to be a main pillar of growth.
But the crisis looms large. On Wednesday, the Bertelsmann Foundation forecast a global economic crisis if Greece were to leave the euro.
Even though more Germans in a recent poll want Greece to remain in the euro zone than want it out, the willingness of German citizens to give twice-bailed-out Greece more credit if it fails to deliver on saving targets is wearing thin.
Mr. Roesler, who is leader of the Free Democrats, junior partner in the centre-right coalition, said real incomes and consumption could rise even more strongly – by 0.2 percentage points each – if a surcharge on renewable energy were not raised next year.
Subsidies levied on German consumers to support renewable power will rise by 47 per cent next year, but the rise has become an issue within the coalition and has opened up divisions between the ruling parties.