• Date 8 February 2019

Olaf Scholz, Germany’s finance minister, has rejected fears that the country is heading for a serious economic downturn despite mounting evidence of weakening eurozone growth.

But Mr Scholz warned that Germany’s public finances would come under strain as slowing growth brings an end to a run of massive budget surpluses.

The economy was “continuing to move forward” and employment was at a “truly remarkable” high, he said in an interview. “A lot of companies are very confident about their future prospects.”

But Mr Scholz acknowledged that a slower pace of expansion would lead to lower tax receipts and increased pressure on the budget, setting the stage for a growing battle over spending priorities. “We can afford a lot, but not everything, and not at the same time,” Mr Scholz said in a warning to sparring ministers in Angela Merkel’s “grand coalition”.

He was speaking amid concern that Europe and its largest economy could be heading for a downturn. The European Commission yesterday cut its forecast for German gross domestic product this year to 1.1 per cent from 1.8 per cent, and the region to 1.3 per cent from 1.9 per cent.

German industrial output fell unexpectedly in December for the fourth consecutive month, data showed yesterday, and a gauge of business confidence sank to a three-year low in January. German GDP contracted slightly in the third quarter of last year.

Stefan Schneider, Deutsche Bank economist, wrote this week that the fact key indicators were moving below trend and falling provided a “clear indication that Germany is drifting into recession”.

Others were less downbeat. Marcel Fratzscher, head of the German Institute for Economic Research, said last week that “pessimism and talk about [a] recession are misplaced”.

Mr Scholz, who has been finance minister for almost a year and is deputy leader of the German Social Democratic party, rejected calls from its Christian Democrat coalition partners for tax cuts to stimulate the economy and nip any potential downturn in the bud.

Finance ministry officials have revealed that the government will face a budget shortfall of around €24.7bn by 2023, largely because tax revenues will come in below previous estimates: “What is new is that we can no longer secretly assume that by the end of the year we will have raised more taxes than we planned to,” he said. “Wherever there are additional spending requests, we will have to make savings somewhere else.

The government faces a series of big spending commitments that could put pressure on the budget, especially if the downturn worsens.

A government-appointed commission has set out plans to phase out coal-fired power stations by 2038 that, if adopted, could cost taxpayers up to €80bn over 20 years. Coal would be phased out “without having to take on new debts or raise taxes,” Mr Scholz said. Berlin has also pledged to raise defence spending to 1.5 per cent of GDP by 2024, from 1.24 per cent last year, partly in response to criticism from Donald Trump, the US president.

“The German budget is about €350bn. We can finance everything that we consider important,” Mr Scholz said. “But the government does have to set clear priorities.” Mr Scholz was at pains to present himself as a worthy successor to the hawkish Wolfgang Schäuble, who was famed for his commitment to balanced budgets. “The clear precondition of all government budgetary planning is that we achieve a balanced budget without new debts,” he said.

But he also stressed the need for “social cohesion” and the welfare state, and backed government efforts to develop an industrial strategy designed to protect and promote national champions. On Tuesday, Peter Altmaier, economy minister, said the state should be allowed to acquire big companies threatened by hostile foreign takeovers.

Such a strategy should put Germany at the forefront of efforts to produce electric cars and battery cells, said Mr Scholz, and should apply to financial services.

Since Mr Scholz became finance minister speculation has grown that the government might support a merger between Commerzbank and Deutsche Bank, Germany’s largest lender, which is struggling to convince investors it can reverse persistent declines in revenues. Deutsche’s share price has fallen almost 50 per cent over the past year.

Mr Scholz, whose team has often met Deutsche, Commerzbank and their big shareholders, declined to talk about a possible merger but insisted on the need for a homegrown banking champion.

“We . . . need banks that can develop the ability, competence and strength to accompany globally active German companies,” he said.

On Europe, Mr Scholz said the EU might emerge stronger from Brexit, and that the UK’s looming departure and Europe’s trade tension with the US had made the bloc “grow closer together”.

“I think there is a good chance we can gain a new European momentum,” he added.