German think tanks revisedown growth forecasts

27th April 2004, Comments 0 comments

27 April 2004, BERLIN - Germany's six leading economic research institutes scaled back their 2004 growth forecast Tuesday as weak consumer spending slows the pace of recovery in Europe's biggest economy.

27 April 2004

BERLIN - Germany's six leading economic research institutes scaled back their 2004 growth forecast Tuesday as weak consumer spending slows the pace of recovery in Europe's biggest economy.

In their twice-yearly economic projections, the think tanks have cut their growth forecast for Germany this year to 1.5 percent with the nation's economy also expanding by 1.5 percent next year.

Last October, the institutes predicted a 1.7 percent growth rate for 2004 as optimism grew that Germany was on course to an upswing this year after three years of economic stagnation.

But with unemployment in the country stuck at more than 10 percent and a continuing "back and forth" about the need for economic and welfare reform, the institutes said that weak consumer demand will continue to dampen growth in the nation.

"The German economy is slowly hauling itself out of stagnation," the report said.

The think tanks believe that despite the recent weakening of the euro, Germany will profit less than previously expected from upswing in the world economy that is currently taking shape, partly because of the long-run effects the common currency's recent strong performance.

Moreover, despite a modest improvement in the labour market in the coming 12 months, the institutes say that growth will be too weak to generate significant job growth and say that the numbers out of work will remain above the politically sensitive four million mark.

"Employment will increase only gradually, so that the decline in unemployment will be minimal and income development will remain subdued," the institutes said.

"Private consumption expenditure will continue to be the weak point of the economy this year," they said.

The release of the institutes' report comes in the wake of a string of downward revisions in growth forecasts for Germany with the nation's central bank, the Bundesbank predicting quarter-on-quarter growth of around a very modest 0.25 percent in the first three months of 2004.

With the Chancellor Gerhard Schroeder's Social Democrat-led government using the institutes' projections as the basis for its own forecasts, Berlin is expected to also revise down its 2004 predictions to 1.5 percent from a previous estimate of 1.7 percent.

Responding to the institutions' projections, Both German Employer Federation President Dieter Hundt, Economics and Labour Minister Wolfgang Clement seized on the report as underscoring the need for further reforms in Germany.

The publication of the think tanks' forecasts come just 24 hours after the release of Germany's key business confidence index unexpectedly rose in April.

But analysts said the improvement in Germany's business climate confirmed that the nation was on a course to a modest economic upturn as the euro's recent slide on forex market and a sharp acceleration in the global economy raised hopes for the nation's export machine.

The release of the institutes' latest projections also coincide with press reports that German Finance Minister Hans Eichel and his French counterpart, Nicolas Sarkozy had called on European Central Bank chief Jean-Claude Trichet at a weekend Group of Seven meeting to trim interest rates in a bid to spur growth in the 12-member eurozone.

In the introductory remarks to the ECB's annual report, also released Tuesday, Trichet said that low interest rates were helping to underpin domestic demand in the eurozone and that economic activity had increased in the 12-member currency bloc during recent months.

The downbeat performance of the German economy, as outlined in the institutes' report, and the prospects of further big outlays for unemployment benefits means that Eichel is likely to face an uphill battle in meeting his goal of pushed back the nation's below the critical three per cent mark next year.

With this in mind, the institutes predict that Germany's deficit will again bust the strict three per cent fiscal target for euro-member states over the next two years, coming in at 3.7 percent this year and 3.5 percent next year.

"The state of public finances in Germany continues to be strained, the budget deficit high," the institutes said.

Overshooting the fiscal rules next year means that Berlin will have breached the budget targets as set out in the so-called Growth and Stability Pact four times in a row.

But the institutes are divided on how the government should go about cutting back the deficit with a majority of the institutes calling on Berlin to press on with a politically unpopular hard savings in public spending.

However, two of the institutes, Berlin's DIW and the Halle-based IWH, said Eichel should ignore the three per cent rule because Germany has been particularly badly hit by the economic slowdown and that the ECB could bring its monetary policy into line with Germany's problems alone.

The six institutes that drew up the report were: Munich's Ifo institute; Halle's IWH institute; Hamburg's HWWA institute; Kiel's IfW Institute for World Economics; the RWI; and the Berlin-based DIW German Institute for Economic Research.


Subject: German news

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