German 2005 growth forecast drops to 0.7 pc

26 April 2005

BERLIN – Germany’s six leading economic institutes on Tuesday slashed their growth forecast for Europe’s biggest economy as high unemployment and the surge in oil prices undercut economic expansion.

The institutes halved their 2005 growth projections to a meagre 0.7 percent from the 1.5 percent forecast last year with the move expected to pave the way for Chancellor Gerhard Schroeder’s government to downgrade its projections.

“The German economy is currently in a weak spot”, said Joachim Scheide from the Kiel economic think-tank at a press conference called to release the twice-yearly report.

“The recovery which had been remarkably strong in the first half of 2004 came to a standstill,” he said. The underlying growth momentum would remain limited during the first half of 2005, he said.

“Almost no other European country has, in recent years, posted a development that was so unfavourable,” he said. “The German economy is obviously suffering from fundamental weakness.”

After the weak start to 2005, the institutes are expecting only a modest increase in domestic demand and a lack of momentum from the nation’s export machine. High energy prices, which hit a record USD 57.65 (EUR 44.50) a barrel this month, have slowed global growth.

But the six institutes expect the German economy to pick up speed during the second half of the year with growth coming in at 1.5 percent in 2006.

“The dampening impact from higher oil prices will gradually fade and the detrimental impact of last year’s currency appreciation will subside,” said Scheide. The euro has pulled back from a record high of USD 1.3670 it hit shortly before the start of the new year.

With the European Central Bank having held its benchmark rate at 2 percent for almost two years, the institutes also said that an economic pickup in both Germany and Europe might help the bank to lift rates to 2.5 percent during the course of next year.

Economics and labour minister Wolfgang Clement seized on the report as showing that “the recovery will gradually gain breath and with that its own dynamic.”

However, the expected upswing is unlikely to help ease the pressure on Schroeder’s ruling Social Democrats in the run-up to next year’s national elections in September, with the forecast growth rate falling short of the 2 percent economists say is needed to boost jobs.

The numbers out of work shot up earlier this year to a post-war high of more than 5 million largely as a result of government reforms to Germany’s welfare benefits system.

But while the institutes are expecting the government’s tough labour and welfare reforms to lead to a sharp fall in unemployment during the second half of the year, they believe that the numbers out of work will be about 4.4 million by the end of 2006.

Despite forecasting a rise in employment, the institutes are predicting the jobless rate to be 10.4 percent next year after climbing to 11.1 percent this year.

Germany’s jobless rate is currently 12.5 percent, with 5.2 million people unemployed.

German GDP grew by 1.6 percent in 2004, following a protracted period of economic stagnation.

The report adds to a gloomy economic week for Schroeder’s Social Democrat-Greens coalition with a new downbeat set of jobless numbers tipped to be released on Thursday.

Coming in the wake of lower growth forecasts both by private economists and big international institutions, the think-tank growth forecast is likely to pave the way for the government to cut its official forecast for 2005 from 1.6 percent.

The institutes also expect the German deficit to remain above 3 percent of GDP, the cap set for euro member states, this year and next – coming in at 3.4 percent in 2005 and 3.3 percent in 2006.

In addition to the economic think tank from Kiel, the other institutes drawing up the report included IWH in Halle, the DIW in Berlin, the HWWA in Hamburg, the Ifo institute in Munich and the RWI in Essen.

DPA

Subject: German news