BERLIN (MNI) – The European Commission on Friday forecast German
GDP growth to slow to 0.7% this year and to pick up again to 1.7% next
year.

Noting that growth forces slowed in the second half of 2011, it
remarked that, “overall, available short-term indicators for the first
quarter of 2012 point to stabilisation.”

“The second quarter is likely to see some technical
counter-reaction to the previous quarter’s weather-related effects,” the
Commission assessed.

Even though the trend in new orders is still weak, firms’
assessment of the business outlook has been improving over the past
months and “the crisis related uncertainty should slowly fade away,” the
Commission reasoned.

“On the back of sound economic fundamentals, including strong labor
market performance, strong competitiveness and corporate balance-sheet
positions, the limited need for household and public balance-sheet
adjustments, as well as a noticeable monetary stimulus, domestic demand
is set to remain a major growth driver over the forecast horizon,” the
report stated.

“The sovereign-debt crisis and oil prices remain the key risks to
the German growth outlook,” it cautioned.

Having recorded a strong rise in 2011, household consumption should
be the main contributor to GDP growth in 2012, the Commission asserted.
Steady gains in employment will underpin household confidence, while
recent wage agreements also point to sound nominal income growth, it
noted.

“Prospects for real income growth and consumption are therefore
good, unless oil price increases translate into a more persistent rise
in inflation than anticipated in the baseline scenario,” the Commission
remarked.

Private consumption should continue to expand robustly also in
2013, amid still strong nominal income growth and lower inflation, it
predicted.

Gross fixed capital formation is set to expand considerably more
slowly this year than last year, the Commission said. “Amid the current
uncertainty, some plans for investment in machinery and equipment are
likely to remain on hold during the first half of the year,” it said.

Still, the monetary environment continues to be supportive, as
reflected by favorable financing conditions for German firms and
households. “This should support machinery and equipment investment as
activity and capacity utilisation pick up in the course of the year,”
the Commission said.

Export prospects are markedly weaker than last year, with 40% of
German exports going to Eurozone member states, “some of which are
likely to see very subdued imports due to weak domestic demand,” the
Commission said.

Still, a gradual recovery of intra-EU export growth is expected as
the crisis-related uncertainty dissipates, while exports to emerging
economies should prove resilient, it said. Exports should, thus, regain
momentum in the course of 2012 and 2013, the Commission predicted.

Imports are expected to expand even more quickly, due to lively
domestic demand. Together with a sizeable terms-of-trade deterioration
in 2012, reflecting high energy prices, the projected negative external
trade contribution to growth should be reflected in a further gradual
narrowing of Germany’s current account surplus over the forecast
horizon, the Commission said.

Amid the increasing tightness of the labor market, trade unions
have tabled demands for significant wage increases in several sectors,
the Commission remarked.

With subdued productivity developments this year, as firms have
held on to their staff amid the winter semester’s relatively weak
activity given prospects of increasing labor market tightness, this is
projected to result in a sizeable increase in unit labor costs, it said.

Wage cost developments should also translate into a slight pick-up
in core inflation to around 1.75% on average in 2013, the Commission
predicted. In 2012, inflationary pressures from commodity prices are
projected to remain strong, after oil prices already surprised on the
upside in late 2011 and the first quarter of this year.

The Commission forecast an average HICP consumer-price inflation
rate of 2.3% this year. With moderating commodity prices, inflation
should then fall to 1.8% in 2013, it said.

In line with the more moderate growth outlook, the country’s total
public deficit is projected to fall only slightly, to 0.9% of GDP in
2012 and to 0.7% of GDP in 2013.

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

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