Institutes cut growth forecasts for German economy

BERLIN: Germany's economy will grow significantly less than previously forecast and the risk of a recession has grown as troubles abroad hit export markets and sap consumer confidence, according to two research institutes and the BdB private banking group.

Europe's largest economy will grow 2.9 percent this year and just one percent next year, said the RWI institute, which is led by one of Chancellor Angela Merkel's top economic advisers. Previously it had forecast growth of 3.7 percent in 2011, and 1.7 percent in 2012.

The Halle-based IWH also cut its forecasts to 3.0 percent this year and 0.8 percent next year, while the BdB cut its forecasts to 2.8 percent in 2011 and 1.1 percent in 2012.

"The risk of a recession has grown," RWI said on Wednesday, noting the euro zone debt crisis was unsettling consumers and companies, while tensions in the financial sector were gaining and could impact the real economy.

Germany's economy has been a star performer in the industrialised world since the end of the 2008 financial crisis and has underpinned growth across the euro zone.

But doubts have grown about how much longer the export-driven economy can maintain solid growth rates in light of an expected slowdown in key markets abroad. German growth slowed to 0.1 percent in the second quarter.

"We can only expect small growth in the second half of 2011 and in 2012," RWI said.

The IWH institute said it saw the economy shrinking by 0.1 percent in the fourth quarter and the first quarter of 2012.

"Given that we would have a minus for two quarters in a row, this is technically a recession," IWH economist Oliver Holtemoeller said. "But if you look at the overall picture, what we are looking at is more of a stagnation."

Indeed, the IWH expected growth to return in 2012 as companies, consumers and financial investors regained trust.

Last week German finance minister Wolfgang Schaeuble played down the slew of negative data and said he expected economic growth of 3 percent this year, adding Germany had proved it was possible to consolidate the budget without choking growth.

The BdB said on Wednesday momentum had clearly slowed but it did not envisage a recession taking hold.

Slowing momentum however would also mean lower inflation, the RWI said, which was the positive flipside of the coin. This year, the European Central Bank has had to reconcile monetary policy for a strong German economy and struggling peripheral euro states.

German annual inflation hit 2.4 percent in August, arguing against a possible rate cut at the ECB but the RWI said it expected an increase of consumer prices of just 1.8 percent next year, in line with the ECB's target of just below 2 percent.

Copyright Reuters, 2011