FRANKFURT – Germany's economy is still shaken by the euro zone crisis and the bloc's woes pose the biggest risk to the outlook, Bundesbank chief Jens Weidmann said on Tuesday, adding growth should pick up later this year.
Europe's economic powerhouse expanded robustly during the first two years of the euro zone crisis but growth slowed last year and the economy shrank 0.6 percent in the fourth quarter.
Most economists still see the country escaping a recession, defined as two consecutive quarters of contraction, by growing weakly in the first quarter before regaining momentum. German growth is crucial to underpinning the euro-zone economy.
"Only some of the confidence lost as a result of crisis has been recovered so far," Weidmann, a member of the European Central Bank's policymaking Governing Council, said in a statement released with the Bundesbank's 2012 earnings.
He nonetheless expected growth to strengthen as the year progresses, assuming there are no further shocks to confidence.
The German economy was still in good shape, Weidmann added. Germans' concerns about inflation should be taken seriously, he said, but there was no reason to stir up fears of inflation.
"In the short term, we in the euro area have, if anything, declining inflation risks," Weidmann said, adding that in the medium-term it was important to leave no doubt about the 'stability orientation' of ECB monetary policy.
The ECB discussed cutting interest rates last week, but decided to keep them on hold, citing positive economic survey indicators, which in turn suggest it is ready to keep rates at 0.75 percent barring the economy taking another turn for the worse.
(Writing by Paul Carrel. Editing by Jeremy Gaunt.)