German budget deficit set to fall

7 April 2004

BRUSSELS – Germany’s long-running excessive budget deficit will fall to 2.8 per cent of Gross Domestic Product (GDP) in 2005, in line with Berlin forecasts and just under the eurozone limit of 3 per cent of GDP, the European Commission said Wednesday.

Germany has been breach of the eurozone rules since 2002 when its budgetary deficit climbed up to 3.2 per cent, reaching 3.9 per cent in 2003 and an estimated 3.6 per cent in 2004.

Meanwhile the commission said the 12-member eurozone will grow by 1.7 percent in 2004, rising to 2.4 percent in 2005, but the currency bloc’s performance will continue to lag behind more robust growth in the United States and Asia, the European Commission said Wednesday.

“In view of the buoyancy of global growth and trade and the returning confidence of domestic producers and consumers, the eurozone recovery is set to gather momentum this year,” the Commission said in its spring economic forecast.

Eurozone growth stood at a very modest 0.4 per cent in 2003. Germany is the eurozone’s biggest economy.

The Commission – the European Union’s executive agency – said that in addition to external demand, the eurozone recovery was underpinned by a rise in investment expenditure, supported by a more gradual pick-up in private consumption.

But it warned that eurozone performance would still be lower than the average 2004 world growth rate of 4.5 percent and the 4.2 percent growth rate expected in the US.

The economic outlook for Asia, excluding Japan, is even brighter, with growth estimated at about 7 percent in 2004-2005.

Despite “encouraging signals” in support of a continuation of global growth, the Commission warned that rising oil and other commodity prices posed a danger to the world economy.

A “renewed sharp appreciation” in the euro exchange rate could also undermine activity mainly in the euro-area manufacturing sector, especially in countries which depend on external demand to generate economic growth, the Commission report said.

The EU executive underlined that the economies of incoming EU states expanded on average at a robust 3.6 percent in 2003, with average growth set to be around 4 percent in 2004 and 2005.

The strongest acceleration of growth is forecast in Poland (from 1.4 percent in 2002 to almost 5 percent in 2005) on the back of an expansionary fiscal policy.

Among the high-income acceding countries, Cyprus is also expected to grow relatively strongly, but the prospects for reunification entail both upside and downside risks, the Commission cautioned.

Growth in Germany would rise by 1.8 percent in 2005 from 1.5 percent this year, the Commission said in its spring economic forecast.

“A gradual recovery should take hold over the next two years,” the Commission report underlined.

Germany’s exports were benefiting strongly from an accelerating world economy, it said, with export demand not being hampered by the strong euro.

Domestic demand was also set to recover, the report said, adding: “The income tax reductions in January 2004 and 2005, rising consumer confidence and a sizable pent-up demand should be conducive to the expected turnaround in consumption.”

DPA

Subject: German news