German forecasters slash growth, urge spending boost

9th October 2014, Comments 0 comments

Germany's leading economic institutes on Thursday slashed their forecasts for growth this year and next year and said the government needed to increase spending in order to boost growth.

The German economy, Europe's biggest, would grow by just 1.3 percent in 2014 and 1.2 percent in 2015, the institutes predicting.

This is much lower than the 1.9 percent and 2.0 percent they had previously expected.

The call for extra spending will be welcomed by France which is rebelling against EU budget austerity and calling for action to boost growth.

"Economic growth in Germany has cooled noticeably," the institutes -- Ifo in Munich, DIW in Berlin, RWI in Essen and IWH in Halle -- said in their widely watched half-yearly report, used by the government as a basis for its own economic forecasts.

"After gross domestic product contracted in the second quarter and likely stagnated in the third quarter, the economic engine is finding it difficult to get going," the report said.

"The German economy is stagnating. And there's no indication for the moment that that will change before the end of the year," DIW economist Ferdinand Fichtner told a news conference.

Domestic demand was weak, with the consumer climate deteriorating and companies continuing to scale back investment.

And foreign demand was also weak, with "only sluggish growth in the global economy and slowing momentum in the euro area," the institutes said.

Earlier, trade data for both France and Germany showed that the economic skies above the eurozone are continuing to darken, as exports from its two biggest economies dropped sharply.

German exports contracted by a massive 5.8 percent in August -- the steepest drop since January 2009 -- causing the trade surplus to shrink to 17.5 billion euros.

In neighbouring France, exports dropped by 1.3 percent, pushing the trade deficit up to 5.8 billion euros, the highest figure since January.

- ECB measures can't help -

A policy of easy money, as currently practised by the European Central Bank, was not the cure-all for the dilemma, the institutes argued.

"Monetary policy is trying its best to stimulate the eurozone economy and interest rates are very low in Germany as a result.

"However, the latest raft of measures are unlikely to provide any additional impulses for the economy," the institutes warned, referring to the ECB's contested plans to buy bonds and other assets in order to inject cash into the economy.

The onus was therefore on governments. And Berlin should increase spending in the public sector, the experts believed.

"The government isn't making sufficient use of the margin for financial manoeuvre with regard to investment, such as in infrastructure," said DIW's Fichtner.

"On the spending side, public spending should be increased in those areas which can potentially boost growth," the institutes said.

Fichtner suggested that balancing a country's books "isn't necessarily an end in itself from an economic point of view."

In fact, it could cost more in the long run, in terms of low growth, than the immediate costs of a small deficit, he argued.

- Budget tensions -

The institutes' call for increased public spending will please Germany's other eurozone partners, such as France, which are arguing for a relaxation of the single currency bloc's budget rules, even though Berlin is adamant about the need for rigorous public fnances.

Speaking at an informal meeting of European Union leaders in Milan earlier this week, French President Francois Hollande threw down the gauntlet to Merkel by ruling out any further austerity measures to ensure France's budget deficit is brought into line with EU targets earlier than 2017.

Instead, Hollande said, the rules should be eased to reverse flagging growth across the eurozone.

"We have to adjust the rhythm of budgetary policy in relation to the challenge of growth," Hollande said. "If everyone imposes austerity, which is not the case of France, there will be an even greater slowdown of growth."

At the four institutes' new conference, Roland Doehrn of RWI, acknowledged that the budget question was a "source of tension."

But Oliver Holtemoeller of IWH insisted: "It's not a measure of spending as much as possible," but kick-starting the moribund economy.


© 2014 AFP

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