FRANKFURT (MNI) – Germany’s economy will slow considerably next
year as the Eurozone crisis and weakening global growth hit the
country’s key export sector, the Bundesbank projected in its latest
monthly report, published Monday.

The German central bank confirmed recent forecasts that see real
GDP slowing to 0.6% in 2012 from 3.0% this year due to a lean period
over the winter months. In 2013, growth is expected to pick up to 1.8%.

This means that German growth will stay within the corridor of its
growth potential, estimated at 1.25%, the report said. However, the
Bundesbank warned that the “uncertainty surrounding the outlook is
exceptionally high” and that risks are skewed to the downside.

“Should it be possible to overcome the fiscal crisis with planned
reforms in the near future and ease inventors’ caution, medium term
growth in Germany could be stronger than projected. Downside risks
stemming form the debt crisis, however, should be given more weight,”
the report said.

German inflation should drop from an average of 2.5% in 2011, as
slowing growth eases domestic price pressure and global commodity prices
continue to decelerate, the Bundesbank said. Inflation is expected to
slow to 1.8% in 2012 and 1.5% in 2013.

“Risks to the inflation outlook primarily stem from oil prices and
exchange rates,” the report said. “Given the projected global economic
developments, it is quite possible that the oil prices will not ease
significantly but remain at current levels.” A more pronounced global
slowdown, on the other hand, could exert downward pressure on commodity
prices, it said.

The German economy has lost significant momentum since the start of
fall, the report said. Nevertheless, a sound domestic environment,
reflected in the construction sector and private consumption, coupled
with a slight improvement in sentiment indicators suggests that “the
dent in growth may not be too pronounced.” In Q4, German growth should
see a sideways trend, the Bundesbank said.

While domestic conditions suggest that a broad-based recovery
remains intact, weakening global demand for German exports are likely to
weigh on developments ahead.

Global growth is expected to slow over the winter months as
developments in the Eurozone and tighter fiscal and monetary policy in
emerging markets continue to weigh, the report said.

In the absence of any further shocks in connection with the debt
crisis in the euro area, global growth should gain momentum in the
second half of 2012, the Bundesbank said. It projects global growth of
3.5% in 2012 and 4.0% in 2013.

“It is expected that the [growth ] moderation among Eurozone
trading partners will be more pronounced and the recovery will be slower
than in other industrialized countries,” the report said.

German exporters are likely to feel a significant impact from
slowing demand in Europe, the Bundesbank said.

“German exporters’ sales markets will likely grow 3.5% next year –
significantly less than in the previous two years,” the report said. Six
month ago, the Bundesbank had still expected sales markets to grow by
6.9%. New forecasts see a recovery to 6% growth in 2013.

In total, the Bundesbank expects real exports to rise by 3.25% in
2012 and 5.75% in 2013 after 8.25% in 2011. Given robust domestic
demand, imports are expected to outpace exports and could rise by 4.25%
in 2012 and 6.5% in 2013 after 7.5% in 2011. This means that trade
contribution to GDP would be negative in 2012 and neutral in 2013, the
report said.

On the domestic front, investment is likely to slow from the
previous to years but should continue to “significantly outpace” GDP
growth in 2012 and 1213, the Bundesbank projected.

Housing construction should continue to remain robust and private
consumption will likely continue to benefit from strong labor market
conditions and rising wages, the report projected.

The labor market should continue to improve slowly, bringing the
unemployment rate down to 6.8% in 2013 from 7.0% in 2012 and 7.1% in
2011, the report said. Available income should rise by 2.75% in both
2012 and 2012 after a 3.25% increase in 2011. As a result, private
consumption should rise by 1.25% in 2012 and 1.5% in 2013.

In terms of public finances, Bundesbank said that the government’s
projection of a 81% debt-to-GDP ratio at the end of 2011 is “plausible,”
but uncertainty surrounding this projection is significant given the
debt crisis.

Based on expectations of a relatively stable deficit ratio over the
next two years, the debt ratio should drop “noticeably” over the same
time horizon. Again, uncertainty is high given possible support measures
for Eurozone member states and ailing banks, the Bundesbank said. In any
case, debt will continue to exceed the 60% mark at the end of the
forecast horizon, the report said.

–Frankfurt newsroom +49 69 72 01 42; e-mail: frankfurt@marketnews.com

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