BERLIN (MNI) – The DIW economic research institute on Wednesday
raised its forecast for German GDP growth this year and lowered it for
next year.

The Berlin-based institute now sees GDP growth of 1.9% in 2010 and
1.7% in 2011. In April, it had forecast growth rates of 1.7% and 1.8%,
respectively.

“The economy is slowly gaining momentum but the driving force is
once again foreign demand,” DIW President Klaus Zimmermann said.
Domestic demand will remain weak this year because consumers are
unsettled by the European public debt crisis, he argued.

“The financial crisis is not yet nearly digested and international
politics is not progressing with financial market regulation,”
Zimmermann argued.

The German government’s budget consolidation plans are also
weighing negatively on consumer sentiment, DIW chief economist Christian
Dreger reckoned. “Still, we have to use the opportunity now to
consolidate public budgets,” he said.

But the announced consolidation measures alone won’t suffice to get
debt under control again, Dreger asserted. “We won’t be able to avoid
tax hikes,” he predicted.

The country’s total public budget deficit is forecast by DIW to
rise to 4.8% of GDP in 2010 from 3.3% in 2009. In the coming year, the
institute expects the deficit to shrink to 3.7%. DIW expects domestic
demand to be the main growth driver next year.

Rising purchasing power of households and increasing confidence in
the sustainability of the upswing will boost consumption and investments
then, it predicted.

Inflation is expected to remain moderate in Germany over the
forecasting period. Average inflation is forecast by the institute at
1.4% this year and 1.5% next year.

The economic recovery will positively influence the country’s labor
market. Annual average unemployment is seen falling from 3.423 million
last year to 3.325 million this year and further to 3.218 million next
year.

For the eurozone, DIW is projecting GDP growth of 1.0% in 2010 and
of 1.5% in 2011. Eurozone HICP inflation is expected to average 1.2%
this year and 1.4% next, thus remaining below the ECB’s price stability
definition of inflation close to but below 2%.

DIW said it expects that inflation developments will make a tighter
monetary policy in the Eurozone necessary in the second half of 2011.

The euro depreciation over the past months is no reason to be
worried, the institute asserted. The euro’s foreign exchange rate level
is currently not disproportionate, it argued.

The uncertainty in bond markets remain a problem, the institute
said, noting that it makes financing for businesses more difficult and
increases the risk of a credit crunch.

The decision of the European Central Bank to purchase government
bonds was appropriate in the current situation, DIW said. Yet it
acknowledged that the move had damaged the credibility of the central
bank.

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

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