FRANKFURT (MNI) – The strong second quarter and ongoing growth over
the rest of this year should help the Germany economy to grow by 3% in
2010, the Bundesbank said in its Monthly Report released Thursday.

The new projection marks a sharp upward revision from the previous
1.9% forecast issued in June and follows a much stronger than expected
GDP rise of 2.2% in the second quarter and an upwardly revised first
quarter result (+0.5% after +0.1%).

Although weaker global growth is likely to slow the export-lead
recovery in the months ahead, the central bank expects the domestic
upswing to be increasingly self-sustaining.

In face of wide criticism that Germany’s export-driven growth model
does nothing to help weaker Eurozone countries out of the recession and
will instead contribute to imbalances in the region, the central bank
pointed out that other euro area states very much benefit from Germany’s
strong rebound.

“The economic upward trend should continue in the second half of
the year,” the Bundesbank predicted. “After the extraordinary spring,
the rate of growth should normalize,” as export demand is likely to slow
amid weaker global growth.

The Bundesbank said that growth rates in southern and eastern Asian
countries should be less dynamic in the months ahead, while the growth
outlook for industrial countries is “moderate”. This echoes observations
from the European Central Bank, which said there could be some
moderation in global growth particularly in emerging markets.

At the same time, increasing demand for German investment goods —
outpacing basic goods exports for the first time in the second quarter
— reflects growing optimism among Germany’s key trading partners, the
central bank noted.

Along with weaker export growth, the strong impulse to domestic
activity from the construction sector in the second quarter is likely to
wane as the positive effects from a catch-up after the exceptionally
cold winter and government stimuli peter out, the report said.

Nevertheless, the central bank said that domestic activity should
be able to pick up some of the slack from weakening exports, given
“signs that the economic recovery in Germany is increasingly
self-sustaining.” The recent pick-up in investment goods demand and
private consumption already bear this out, the Bundesbank said.

The report said that the recovery in domestic industry “should have
continued into the second half. Looking ahead, industrial investment
activity should gain momentum due to urgent maintenance needs and needed
updating of product lines. Rising corporate optimism also point to a
pick-up in investment, the Bundesbank added.

In light of the high capacity underutilization in many sectors, it
is still likely to take some time before domestic investment activity
returns to normal levels, the Bundesbank cautioned.

As firms opt to invest, credit availability should not pose a
constraint, the central bank said. “Neither surveys among banks nor
surveys among companies point to risks of a credit crunch in Germany.”

Private consumption, which has only recently returned to positive
growth, should also play a more supportive role in the months ahead, the
Bundesbank said, citing the ongoing recovery in the labor market.

Following criticism that Germany is not doing enough to help its
Eurozone neighbours by stimulating domestic demand, the central bank
pointed out that the export-lead recovery had resulted in positive
growth impulses of European neighbours.

“With a view to trade with EMU countries, it stands out that during
the first two quarters of 2010, imports to Germany rose twice as fast as
exports from German companies to the region,” it said.

“European partner countries thus benefit substantially from the
strong growth rates of the German economy, that are primarily driven by
exports to external markets.”

Industrial production has recovered on a broad basis, reflected in
the 5.2% surge in 2Q manufacturing output, it said. While consumption
goods production rose only slightly, basic goods posted a sharp 6.9%
gain and investment goods were up 5.5%. Stronger industrial activity
also helped the services sector as demand from industry rose, the report
said.

Meanwhile, private consumption should have been positive in the
second quarter after declining in the previous three quarters.
Construction rose by 16.1%, driven mainly by one-off effects from public
stimulus and catch-up effects after a cold winter.

–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com

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