BERLIN (MNI) – Germany’s leading economic research institutes on
Thursday raised their forecasts for German GDP this year and next to
+3.5% and +2.0%, respectively, from the +1.5% and +1.4% figures
projected in April.

“The German economy is in an upswing,” the institutes said. The
recovery has gained in breadth and is not driven solely by exports and
the inventory cycle anymore. “Rather, domestic demand has started to
pick up, both private consumption spending and business investments are
increasing perceptibly,” the institutes’ economists pointed out.

Still, the institutes expect that the momentum of the recovery will
be markedly slower over the remainder of the forecast period than it was
in the first half of this year, mainly due to moderating global economic
growth.

On a quarterly basis, the think tanks expect German GDP to increase
by 0.9% in 3Q and by 0.5% in 4Q. For 2011, they forecast quarterly
growth rates of 0.2% in 1Q, 0.3% in 2Q and 0.4% in both 3Q and 4Q.

“In the second half of 2010 the production increase will lose
momentum,” the economists asserted, predicting that exports will
moderate perceptibly. “Also, the strong momentum of equipment
investments will likely not continue,” they said. Construction
investment will also slow, they added.

“However, for private consumption a turnaround is in the offing,”
the institutes reckoned. “For the first time in several years a
perceptible increase is to be expected,” the economists said.

The overall healthy recovery is seen bringing unemployment down
further and improving the country’s fiscal situation over time.

The think tanks expect that Germany will return next year to below
the EU’s deficit ceiling of 3%-of-GDP, stipulated in the Stability and
Growth Pact. They project a public budget deficit of 2.7% of GDP in 2011
after 3.8% in 2010. The budget consolidation course announced by the
German government won’t hurt the country’s economic recovery, they
argued.

Still, the report cautioned that there exist “significant risks” to
the forecasts. “The likelihood is by no means small that the U.S. will
fall back into a recession,” they said. Moreover, the sovereign debt
crisis in some states of the Eurozone is far from over, the economists
warned.

“A worsening [of the EMU sovereign debt crisis] with higher risk
premiums for government bonds in the Eurozone, or even use of the
European financial stabilization mechanism by a debtor country, would
also have an impact on the German economy,” the think tanks reasoned.

Inflation over the coming two years is seen remaining moderate. The
institutes forecast German annual average harmonized HICP inflation of
1.1% and 1.6% this year and next.

The Eurozone’s annual average harmonized HICP inflation is forecast
by the think tanks to be +1.4% in 2010 and +1.3% in 2011 — still
markedly below the ECB’s definition for price stability, which is close
to but below +2%. Eurozone GDP growth is projected at 1.6% this year and
1.3% next year.

The institutes expect that the European Central Bank will raise
interest rates by 25 basis points only towards the end of next year.
“The ECB will for the time being stick to their interest rate of 1% for
the main refi operation” and will gradually phase out the exceptional
measures, the report predicts.

For their forecasts, the institutes assumed an average euro-dollar
exchange rate of $1.35 through the end of 2011. The price of Brent crude
oil is projected to average $78 per barrel this year and $80 next.

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 involved, namely the Swiss KOF institute and the
Austrian IHS institute.

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

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