BERLIN (MNI) – Germany’s leading economic research institutes on
Thursday raised their forecasts for German GDP this year to +1.5% from
the +1.2% forecast in October of last year.

For next year they forecast GDP to grow at a slightly lower rate of
1.4%. It was their first forecast for 2011.

In their report the institutes point to contrary developments from
fiscal and monetary policy on the economy. They believe that the
European Central Bank will stick to its expansive monetary policy and
leave interest rates unchanged until the end of next year. It will only
gradually unwind its extraordinary measures, they said.

Fiscal policy, which is still noticeably stimulating the economy,
will have a dampening effect on GDP next year when the stimulus measures
expire, the think tanks noted.

“Against this backdrop, the institutes expect that the pick up of
the economy continues, but at a moderate path,” they said. Due to the
economic crisis, the medium-term outlook for the German economy has
worsened, the institutes remarked. Economic output will reach the level
of 2008 only by 2013, they predicted.

“The risks for the German economy remain large,” the institutes
cautioned. A backlash of the global economy would hit Germany’s
export-dependent economy severely, they said. “Moreover, there exist
tensions in the Eurozone which carry also risks for the economic
recovery,” they argued.

The think tanks also pointed to the still difficult situation in
the banking sector. “Again and again there can occur problems on
financial markets – for example when doubts arise on the solvency of
some states due to high deficits,” they said.

Still, “all in all little points currently to the existence of a
broad credit crunch,” the institutes reckoned.

They project that exports, which had slumped severely in the
crisis, will be the main driver for the recovery. The sector will profit
from the pick-up of growth in emerging economies, the think tanks said.

Exports are forecast to rise by 7.1% this year and by 6.3% next
year. Imports are tabled at +5.5% and +5.7%, respectively. Yet, domestic
demand will also be picking up, the institutes said. They expect private
consumption to grow by 0.8% next year after a projected slump of 0.4%
this year. Government consumption is forecast at +1.6% in 2010 and +1.1%
in 2011.

Gross fixed-capital formation is forecast to grow by 1.4% this year
and by 1.7% next year. Equipment investment spending is predicted to
increase by 2.2% in 2010 and by 2.9% in 2011. Construction investment is
projected at +0.4% this year and +0.7% next year. Other investment
spending is seen at +6.2% in 2010 and +4.1% in 2011.

Due to demographic reasons, the institutes expect unemployment to
decrease moderately this year and next. Annual average unemployment is
forecast to fall to 3.382 million in 2010 from 3.423 million last year.
In 2011 it is forecast to decrease further to 3.313 million.

The country’s fiscal position will worsen further due to rising
expenditures and decreasing tax revenue, also due to tax cuts which came
into effect at the start of the year, the institutes said.

They project a total public budget deficit of 4.9% of GDP in 2010.
Last year, Germany had posted a deficit of 3.3%. For 2011, the
institutes forecast that the deficit will fall slightly to 4.2%, due to
the exit from stimulus measures and the first steps towards budget
consolidation.

Inflation over the coming two years is seen remaining moderate. The
institutes forecast German annual average harmonised HICP inflation of
0.9% and 1.0% this year and next.

Headline inflation will be mainly driven by rising commodity
prices, while core inflation will be held down by still low
capacity-utilisation rates and subdued wage growth, the report said.

Eurozone annual average harmonised HICP inflation is forecast by
the institutes at +1.4% in 2010 and +1.2% in 2011 — still markedly
below the ECB’s definition for price stability of close to but below
+2%.

For their forecasts, the institutes assumed a euro-dollar exchange
rate of $1.35 until the end of 2011. The price of Brent crude oil is
projected to average around $80 per barrel this year and next.

The forecasts were jointly compiled by the Munich-based Ifo
institute, the Kiel-based IfW institute, the Halle-based IWH institute,
the Essen-based RWI institute and the Duesseldorf-based IMK institute.
There were also three foreign institutes involved, namely the Swiss KOF
institute, as well as the Austrian institutes Wifo and IHS.

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

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