BERLIN (MNI) – Germany’s Bundesbank said Friday it expects that
“after the fulminant catching-up process,” the German economic recovery
will continue over the next two years.

The central bank predicted GDP growth of 3.6% this year, 2.0% next
year and 1.5% in 2012. Yet, it pointed to a marked statistical overhang
next year as the reason why 2011 average growth is higher than that of
2012.

GDP will reach the pre-crisis level — of the first quarter of 2008
— by the end of 2011, the Bundesbank forecast. “Around this time the
output gap should be closed, which had widened broadly due to the
crisis,” it asserted.

While exports will remain the main growth-driving force, they will
increasingly stimulate domestic demand, the report said. Equipment and
construction investments are also seen boosted by low interest rates,
while private consumption is supported by rising employment and wages,
it remarked.

Average annual unemplyoment is predicted by the Bundesbank to fall
from 3.2 million this year to 3.1 million next year and further to 2.9
million in 2012.

German inflation will likely increase at a “stability-consistent”
path, the central bank said. It forecast German HICP inflation to rise
from 1.1% this year to 1.7% next year and fall back to 1.6% in 2012.

German HICP inflation ex-energy is tabled at 0.7% in 2010, 1.1% in
2011 and 1.5% in 2012.

Due to the healthy economic recovery, Germany’s fiscal situation is
seen improving. The Bundesbank forecast that the public deficit will
fall to 2.5% of GDP next year from a projected 3.5% this year. “In the
year 2012, the improvement of public finances could continue if the
budget consolidation course is upheld,” it asserted.

As downside risks to its forecast, the Bundesbank noted “continuing
uncertainties” on financial markets related to the “fragile state” of
public finances in a row of industrialized countries.

The main risks for price stability are coming from international
commodities markets, the central bank said. Given the expected strong
global growth, a stronger rise of commodity prices “is not unlikely,” it
said. This would have an immediate impact on energy and food prices, it
pointed out.

While wages could also rise more strongly than expected, this would
only have an impact on inflation at the end of the forecasting period,
the Bundesbank remarked.

On the other hand, if the economy develops worse than expected,
inflation rates could develop more moderate than forecast, it noted.

For its forecasts, the central bank assumed an effective foreign
exchange rate of the euro of $1.34 in 2010, $1.39 in 2011 and again
$1.39 in 2012. Moreover, the forecasts are based on the assumption of a
crude oil price of $79.5 this year, $88.6 next year and $90.7 in 2012.

The Bundesbank’s forecasts form part of the new ECB’s staff
forecasts released yesterday. Upbeat expectations issued by the German
central bank suggest that Germany is expected to remain the key growth
driver in the common currency region in the month ahead.

The new ECB forecast puts 2010 GDP in a range of 1.6% to 1.8%, with
a growth midpoint of 1.7%. That compares with a range of +1.4% to +1.8%
and a midpoint of 1.6% in the September forecast. For 2011, the staff
now projects growth in a range of 0.7% to 2.1%, yielding a midpoint of
1.4%. In September, the forecast for next year was also in an extremely
wide range of +0.5% to +2.3%, yielding the same midpoint of 1.4%.

The ECB staff also released its first GDP forecast for 2012,
putting GDP in a wide range of +0.6% to +2.8%, for a midoint of +1.7%.

Following the release of the new staff forecasts, ECB President
Jean-Claude Trichet said the new growth projections reflect recent
indicators showing “the positive underlying momentum of the economic
recovery in the euro area remains in place.”

However, risks to growth are “tilted to the downside with
uncertainty remaining elevated,” the ECB chief cautioned.

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