German Chancellor Angela Merkel’s government cut its growth forecast for Europe’s biggest economy as austerity policies in cash-strapped euro-region countries and cooling world trade damp exports.

German gross domestic product growth will slow to 0.4 percent this year from 0.7 percent in 2012, the Economy Ministry said in its annual report.

“We assume that the phase of weakness this winter will be overcome in the course of the year and that our economy gain traction again,” Economy Minister Philipp Roesler (photo) said in Berlin.

The euro area, Germany’s largest export market, fell into recession last year as countries from Greece to Spain cut spending to rein in deficits and weaker growth in the U.S. and China curbed global trade. Slowing growth may make it harder for Merkel’s government to adhere to a constitutional debt rule.

Merkel’s government borrowed 22.5 billion euros last year, less than the 28.1 billion euros estimated in the latest supplementary budget. Adjusted for swings in the economy and one-time effects, the federal shortfall narrowed to 0.32 percent of GDP last year, beating a target of 0.35 percent set for 2016. The government expects the so-called structural deficit to widen to 0.34 percent of GDP this year.

The Bundesbank predicts Germany will avoid recession, saying on Dec. 7 that the economy should stabilize in the current quarter after shrinking in the final three months of 2012. Still, the Frankfurt-based central bank lowered its outlook and forecast growth of just 0.4 percent this year before accelerating to 1.9 percent in 2014.

Factory orders, adjusted for seasonal swings and inflation, dropped 1.8 percent in November amid weak demand from outside the euro area, the Economy Ministry said Jan. 8. Exports plunged 3.4 percent that month, marking the steepest decline in more than a year, the Federal Statistics Office in Wiesbaden said the same day.

Revenue figures published by the Finance Ministry reflect the slowdown in the economy, which may have contracted as much as 0.5 percent in the final quarter of last year. Tax intake rose 0.5 percent from a year earlier in November, compared with 11-month revenue that was 5 percent higher than in the same period the previous year.

[Bloomberg]