–Adds Detail, Comments From Press Conference To Story Sent at 09:45 GMT
BERLIN (MNI) – Germany’s council of independent economic advisers
– the so-called five wise men — expects German GDP growth of 2.2% next
For the current year, the council sharply raised its GDP growth
forecast to 3.7% from the 1.6% it had projected last November.
“Current economic indicators signal that the upswing should
continue albeit at a somewhat slowing speed,” the council said in its
report. External impulses will be increasingly replaced by domestic
momentum, the wise men predicted.
“Some 90% of the growth impulse next year will come from domestic
demand,” council member Peter Bofinger said at a press conference to
present the forecasts. The council expects that 1.9 percentage point of
the 2.2% growth rate in 2011 will be due to domestic demand, he
Sinking unemployment will stimulate private consumption, as
investment spending is boosted by historically low interest rates, the
council’s chairman, Wolfgang Franz, elaborated. There is also leeway for
wages to increase, he said, adding that he did not see a danger of
excessive pay rises.
Last month the German government lifted its GDP forecasts for this
year and next to +3.4% and +1.8%, respectively, from the +1.4% and +1.6%
projected in April.
Because of the healthy economic recovery, Germany will meet the
deficit limit of 3% of GDP set under the EU Stability and Growth Pact by
next year. The wise men forecast a total public budget deficit as a
percentage of GDP of 3.7% this year and 2.4% next year.
German Chancellor Angela Merkel stressed at the press conference
that “we must continue on the path of budget consolidation.”
Current indicators show that the financing situation of German
businesses has improved somewhat, the wise men noted. “The danger of a
broad-based credit crunch, thus, seems mostly gone,” they reckoned.
Yet, the government advisers also eyed risks to the domestic
recovery, noting that heterogeneous developments around the world are
keeping the global economic environment uncertain.
In the assumptions underlying their forecasts, the wise men project
that the European Central Bank will leave interest rates unchanged until
the end of 2011.
Eurozone average HICP inflation is forecast at 1.6% in 2010 and
1.4% in 2011. The ECB’s price stability goal calls for inflation of
close to but below 2%. German inflation is predicted to be 1.1% this
year and 1.4% next.
The wise men assume an oil price of around $86 per barrel until the
end of the forecasting period. The euro-dollar exchange rate is assumed
at $1.40 until the end of 2011.
The government advisers cautioned that the widening differential
between the monetary policy in the US and in the Eurozone puts upward
pressure on the euro.
Depending on the degree to which other central banks intervene in
markets to “prevent an appreciation of their currencies,” the euro could
attract investment, thus putting upward pressure on the common currency,
the wise men suggested.
“This would have negative implications especially for an
export-orientated economy such as Germany,” they underlined.
They added, though, that the likelihood for a currency war is
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