–DIW Leaves 2011 German GDP Forecast Unchanged At +1.8%

BERLIN (MNI) – The German Economic Research Institute (DIW) on
Wednesday lowered its forecast for German GDP this year to +1.7% from
the +2.1% projected at the start of the year.

The Berlin-based institute left its GDP forecast for the coming
year unchanged at +1.8%. It noted that growth in 2010 is markedly
bolstered by a statistical overhang from last year. Thus, the pick-up in
growth next year is more significant than the headline numbers show, it
pointed out.

“We’re leaving the crisis only arduously,” DIW President Klaus
Zimmerman cautioned. “Regarding financial markets there remain large
uncertainties.”

German economic growth this year is supported mainly by the
recovery of the global economy, the report asserted. Yet, Germany is
currently only profiting below average from growing world trade because
the economies of its main trading partners are still weak, DIW remarked.
The institute projects that exports will grow by 5.4% this year and by
3.4% next year. Imports are seen up 2.5% in 2010 and up 5.2% in 2011.

In the coming year, German GDP will be supported by domestic
demand, DIW predicted. Domestic demand growth is forecast to rise to
2.4% in 2011 from 0.4% in 2010.

Private consumption is seen stagnating this year and growing by
1.3% next year. Government consumption is tabled at +1.4% in 2010 and
+1.3% in 2011. Gross fixed capital formation is projected to increase by
1.4% this year and by 1.2% next year.

The German labor market has bottomed out but the economic recovery
is still too weak for a marked decrease of unemployment, the institute
judged. It forecasts annual average unemployment to fall by 9,000 to
3.414 million in 2010 and further to 3.349 million in 2011.

Due to falling tax revenue as a consequence of the crisis and tax
cuts which came into effect at the start of the year, the country’s
fiscal situation will worsen further, DIW asserted. “The situation of
public budgets is desolate,” Zimmermann said.

The think tank projects a total public budget deficit of 5.9% of
GDP in 2010 and of 4.7% in 2011. “There is no leeway at all for tax
cuts,” the DIW President stressed. “Rather, we won’t be able to avoid
tax hikes in order to consolidate budgets,” he reckoned.

Inflation will remain tame over the forecasting period, DIW
assessed. CPI is forecast to average 0.9% this year and 1.3% next year,
mainly driven by energy and commodity prices. Wage pressure will remain
low this year. Unit wage labor costs are projected by the institute to
fall by 1.0% in 2010 and by 0.6% in 2011.

For comparison, eurozone HICP inflation is forecast by DIW at 1.3%
this year and 1.6% next year, still below the ECB’s price stability
definition of inflation close to but below 2%. Eurozone GDP is projected
by the institute at +1.0% in 2010 and +1.5% in 2011.

Over the medium-term, however, DIW sees a “significant inflation
risk,” the report stated. “It cannot be ruled out that the central banks
will miss [the right moment] to gradually exit from their ultra-easy
monetary policy,” it cautioned.

Given the high debt level in industrialized countries, it could be
tempting for governments to consolidate their budgets via inflation, DIW
said.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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