Tuesday, October 28, 2003

German Economy Forecasts

The latest round of forecasts on the German economy strike a mildly optimistic note - with the notable exception of the employment front. Of course these are only guess-timates, and they do seem to be regularly subjected to downward revisions. Apart from the detail that the highpoint seems to be the extra days worked from the a-typical distribution of public holidays, the curious thing is how everyone seems to be looking for growth elsewhere to solve their problems:

The German economy, the biggest in the eurozone, looks set to stage a recovery -- albeit a modest one -- next year after stagnating this year, the six leading economic think-tanks in Germany predicted. In their widely watched autumn report, published Tuesday, the institutes forecast that gross domestic product (GDP) in Germany would "stagnate this year and only expand moderately next year. In 2004, real GDP will grow by 1.7 percent."

The six institutes are Berlin-based DIW, Ifo in Munich, HWWA in Hamburg, RWI in Essen, IfW in Kiel and IWH in Halle. And the new forecasts represent a downward revision from the institutes' previous report published in the spring, when the think-tanks had been pencilling in growth of 0.5 percent this year and a pick-up to 1.8 percent next year. Nevertheless, Economy and Labour Minister Wolfgang Clement insisted that the institutes' latest report provided "proof that the German economy has been gathering momentum since the summer". "Already in the second half of the year, we've noted a slight revival in the German economy," Clement said in a statement.

"And next year, recovery will get on a broader footing, thanks to positive global economic developments, an increased number of working days" and the anticipated positive effects of the planned tax cuts, the minister continued. The German government, which takes into account the six institutes' forecasts when drawing up its own prognoses, is scheduled to publish its new updated growth forecasts on Thursday. So far, the government has been predicting growth of 0.75 percent for the current year and 2.0 percent next year, but recent press reports have suggested that those forecasts would now be cut to zero and 1.75 percent, respectively.

Despite the first signs of an upturn, the six institutes remained cautious in their autumn report. While "there have been the first signs of an improvement since the midddle of the year, as the recovery we had predicted back in the spring gradually materialises," there could still be no talk of an "upswing", the institutes insisted. Economic activity next year would benefit from the substantially higher number of working days compared with 2003, with many public holidays in 2004 falling on the weekend, the report said. "In the first six months of 2004, economic developments will be accelerate largely as a result of increased domestic demand," as investment and household consumption receive a boost from the tax cuts scheduled to come into effect at the start of next year. Then, in the latter part of the year, growth would be driven increasingly by foreign demand, the institutes predicted.

Nevertheless, the modest economic recovery would not be sufficient to bring down the high level of unemployment in Germany, the institutes said. They predicted that the total number of people out of work in Germany would average 4.448 million in 2004 compared with an anticipated 4.393 million this year. Such figures would also continue to undermine Germany's public finances. Indeed, the German public deficit, which already amounted to 3.5 percent of GDP and was therefore in breach of the 3.0-percent limit laid down in the European Union (news - web sites)'s Stability and Growth Pact, would rise to around 4.0 percent of GDP this year, the institutes predicted. And despite Berlin's pledge to bring the deficit ratio back below 3.0 percent next year, the planned tax cuts and welfare and pension reforms meant the government would only be able to scale back the public deficit to 3.5 percent of GDP in 2004. Inflation in Germany was likely to remain firmly under control, averaging 1.0 percent in 2003 and 1.3 percent in 2004, the institutes predicted.
Source: AFP, Yahoo News

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