BERLIN (MNI) – The economic panel of the German Banking Association
(BDB) on Monday projected robust German GDP growth of 3.0% this year and
2.3% in 2012.

“The upswing in Germany has gained in breadth and thus in
stability,” the chief economists of the top private banks in the country
said in their joint forecasting report.

In addition to the driver of exports, domestic demand is also now
contributing significantly to economic growth, the chief economists
observed. Exports are forecast to grow 8.1% this year and 6.4% next
year.

Equipment investment is projected to pick up by 9.2% in 2011 and by
5.2% in 2012. Construction investment is seen at +2.0% both this year
and next.

Private consumption growth is forecast by the bank economists at
2.0% in 2011 and 1.7% in 2012, boosted by the ongoing decline in
unemployment and above-average wage rises.

Economic developments in the Eurozone will remain bifurcated for
the time being, the report noted. It pointed to “very strong growth in
the core countries of the Eurozone, especially in Germany,” while the
economies of the peripheral countries are still burdened by problems in
housing markets.

Still, the continued recovery of the global economy as well as
strong growth in the Eurozone’s core countries will also help the
peripherals, the banks economists argued. “Growth differentials in the
currency union should recede, albeit slowly” in 2012, they predicted.

The bank economists expect the Eurozone to grow on average by 2.0%
both this year and next. Eurozone harmonized HICP inflation is seen at
2.2% in 2011 and 2.1% in 2012 — above the ECB’s definition for price
stability in both years.

The risk for the inflation forecasts continues to be on the upside,
“mainly because business surveys have shown that firms are passing on
the major part of higher production costs to consumers,” the bank
economists said.

The ECB will likely begin to raise interest rates in the second
quarter, and “two to three steps of 25 basis points each seem plausible
until the end of the year,” they said.

However, the sovereign debt crisis in the Eurozone will likely not
be exacerbated by these interest rate hikes, the economists argued. “The
core of the problem is less the general interest rate level…than the
high risk premia” for the fiscally ailing member countries, they said.

Markets are currently focusing on efforts by EU leaders to craft a
package of solutions to the debt crisis in time for their summit in
Brussels at the end of March, the economists noted. However, they
cautioned against inflated expectations.

“It would be an illusion to believe that the sovereign debt crisis
could be solved with one big coup,” they said. “Rather, it is realistic
that the sovereign debt crisis can only be defused gradually over a long
period.”

The bank economists advocated allowing the European Financial
Stability Facility (EFSF) to buy bonds of highly indebted Eurozone
member states in the secondary markets. An alternative, they said, would
be to give the EFSF the right to make loans to indebted countries to buy
back their own bonds.

“However, the EFSF must not exert any pressure, because this could
possibly be seen as a de facto default” of the concerned countries, the
economists warned.

Turning to currency markets, the bank economists forecast the euro
at $1.40 at the end of both 2011 and 2012. “On average, the economic
panel projects a slight upward tendency of the euro in 2011 and a
sideways movement in the following year,” they said.

The expected tightening of monetary policy in the Eurozone will
support the euro against the dollar for the time being because an
interest rate hike in the U.S. will likely only occur next year, the
economists argued.

Later in the year, however, “the pick up of the U.S. economy should
give the dollar some tailwind,” they reckoned.

Still, while the euro-negative sovereign debt crisis will likely
remain in the focus of market participants over the coming weeks, the
fiscal policy problems of the U.S. could move more to the forefront in
the course of the year, the bank economists said.

–Berlin bureau: +49-30-22620580; email: twidder@marketnews.com

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