By Tom Fairless and Nina Adam

FRANKFURT--Germany's central bank argued on Monday that the nation's vast current-account surplus is set to shrink markedly and can't sensibly be curbed using political tools, pushing back against criticism of German trade policy from the new U.S. administration.

The Bundesbank's defense comes two days after global financial officials meeting in Baden-Baden abandoned longstanding commitments to free and open trade following pressure from Treasury Secretary Steven Mnuchin.

The Trump administration has been sharply critical of the trading practices of countries such as China and Germany, which it accuses of exploiting global trading partners. Germany's persistent trade surpluses have also come under attack from the European Commission, the European Union's executive arm, which has urged Berlin to reform its services sector and invest more in infrastructure.

In a report, the Bundesbank said Germany's current-account surplus--a broad measure of its foreign trade and investment balance--is likely to fall "markedly" this year as a share of gross domestic product, from 8.25% of GDP last year.

"There's some reason to believe that Germany's current-account surplus might have passed its zenith and will shrink markedly in the current year," the report said.

The Bundesbank argued that the surpluses over the past years are "the result of numerous, mainly private economic decisions both domestically and overseas."

That means they "can't sensibly be steered using political tools," the Bundesbank said. Still, it called for research into how national economic policy could be tweaked to encourage more private investment in Germany, which would help reduce the surpluses.

The Bundesbank said the nation's current-account surplus shrank from 8.75% of GDP in the first quarter of last year to 7.5% in the fourth quarter. And while the surplus in goods trade continued to increase, that was due to lower import prices. In quantitative terms, the goods surplus shrank, the report said.

The report also highlighted the large quantity of direct investments by German companies in the U.S., and by U.S. firms in Germany.

Separately, Germany's top economic advisers also rejected international criticism of Germany's large current-account surplus.

The Council of Economic Experts, an independent body that advises the German federal government, said: "The German current-account surplus is high indeed, but it does not signal a macroeconomic imbalance."

The council said that a big increase in German government expenditure--as advocated by some international economists and politicians--could have a "destabilizing effect" on Germany and the overall eurozone. Instead, it said the government should do more to enhance Germany's attractiveness to investors, because stronger investment would help lower the current-account surplus.

The council forecast a slight reduction in Germany's current-account surplus to 7.1% of GDP in 2018 from 7.5% in 2017 and 8.3% in 2016.

Write to Tom Fairless at tom.fairless@wsj.com and Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

March 20, 2017 08:07 ET (12:07 GMT)

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