BERLIN (MNI) – Germany’s leading economic research institutes on
Thursday raised their German GDP forecast for 2011 to +2.9% from +2.8%
but markedly cut their 2012 projection to +0.8% from +2.0%.

On a quarterly basis, the think tanks expect German GDP in 2011 to
increase 0.6% in 3Q and drop 0.2% in 4Q. For next year, they table
quarterly GDP rates of +0.2% in 1Q, +0.3% in 2Q, and +0.4% both in 3Q
and 4Q.

“In the summer of 2011, the outlook for the global economy has
markedly worsened,” the think tanks remarked in their joint report.
“Especially in Europe, the sovereign debt crisis risks to widen into a
banking crisis.”

Yet, “unlike the rest of the Eurozone, there will likely not be a
recession in Germany,” the institutes predicted. Thus, the labor market
shouldn’t be negatively affected by the short phase of economic
stagnation, they reckoned.

Still, the debt crisis in the Eurozone is weighing increasingly on
the German economy, the institutes remarked. “The heavily increased
uncertainties will be dampening domestic demand, while foreign trade
should not contribute to growth anymore given the difficult position of
[Germany's] main trading partners,” they assessed.

“The biggest risk is a further worsening of the European debt and
confidence crisis, which could markedly worsen financing conditions for
businesses,” the institutes cautioned. Nevertheless, “the institutes do
not expect that this will happen,” the report remarked.

The think tanks do not expect a contagion effect from the Greek
crisis as seen after the collapse of Lehman Brothers. Thus, they don’t
see a heavy recession as in 2008 and 2009.

Rather than preventing the insolvency of individual Eurozone states
by any means, the EU should rather concentrate on developing a workable
insolvency mechanism for states and banks, the think tanks advised.

Germany’s fiscal situation is seen improving further. The
institutes expect that the country’s deficit will sink to 0.9% of
nominal GDP this year and reach 0.6% next year. Still, Germany should
continue on its budget consolidation course, the institutes stressed.

The institutes lowered their forecasts for Eurozone GDP for this
year and next to +1.5% and +0.4% from +1.7% and +1.6%, respectively.

The Eurozone’s annual average HICP inflation is forecast by the
think tanks to be 2.5% in 2011 and 1.5% in 2012. German HICP is projected
at 2.4% and 1.9%, respectively. The European Central Bank’s definition
for price stability is HICP close to but below 2%.

The institutes assume that the ECB will cut interest rates to 1%
until the end of this year and keep it on that level through next year.

For their forecasts, the institutes also assumed an average
euro-dollar exchange rate of $1.38 through the end of 2012. The price of
Brent crude oil is projected at $111 per barrel this year and $113 for
2012.

The forecasts were jointly compiled for the Economics Ministry by
the Ifo institute, the ZEW institute, the IfW institute, the IWH
institute, the RWI institute and Kiel Economics. There were also two
foreign institutes participating, namely the Swiss KOF institute and the
Austrian IHS institute.

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

[TOPICS: M$G$$$,MAGDS$,MT$$$$,M$X$$$,MFX$$$,M$$CR$,M$$EC$,M$$FX$]