German economy set for 2014 rebound on investment, consumption

Germany`s leading economic think tanks Thursday halved their 2013 growth forecast to 0.4 percent but said domestic demand and investment would help drive a strong rebound next year.

AFP| Updated: Oct 17, 2013, 19:17 PM IST

Berlin: Germany`s leading economic think tanks Thursday halved their 2013 growth forecast to 0.4 percent but said domestic demand and investment would help drive a strong rebound next year.

The four institutes predicted that Germany would see its gross domestic product growth rate rise to 1.8 percent next year, from 0.4 percent in 2013.

The latest outlook for this year was down from an earlier forecast of 0.8 percent.

"The German economy is facing an upturn. It will be carried by domestic demand," said a joint statement by the Ifo institute in Munich, DIW in Berlin, IW in Halle and RWI in Essen.

The figures are largely in line with forecasts by the German government, which has predicted 0.5-percent growth for 2013 and 1.6 percent for 2014, and by the International Monetary Fund.

The IMF said recently growth in Europe`s top economy this year will amount to 0.5 percent and reach 1.5 percent next year.

Looking ahead to 2014, the German institutes said they saw a marked upswing from 2013, although they revised their growth forecast down slightly from 1.9 percent announced in April.

Investment is being stimulated by an improving world economic climate and less uncertainty, they said.

In Germany "growing employment and marked pay increases have already provided for a robust development in private consumption for quite some time," they added.

Amid a slowing world economy and difficulties for its European partners who are Germany`s leading markets, Europe`s top economy has gradually moved away from exports being its key driver towards relying more on its domestic market.

Economists from the four institutes expressed relative confidence in the development of the world economy despite nagging structural problems, though said the risk of a possible flare-up of the eurozone crisis could not be ruled out.

Torsten Schmidt, of the RWI, pointed to the continuing US recovery, Japan`s economy benefiting from the new government`s efforts, growth, albeit slower, in developing countries and a brighter outlook for the recession-hit eurozone.

"The steadier rhythm of global economic expansion in the first half of 2013 should continue in the second half and also in 2014," he told reporters.

Germany has avoided the recession that hit many countries amid the eurozone`s sovereign debt crisis.

But economic growth nevertheless slowed to just 0.7 percent in 2012 from 3.0 percent in 2011.

After posting no growth for the first three months of this year, Germany recorded a 0.7-percent uptick in the second quarter.

However the country is not expected to be able to maintain this level of growth, which was stronger in part due to a catch-up effect after a long and cold winter, Schmidt said.

Turning to Germany`s public finances, the country is expected to remain a good example of budgetary discipline, with the institutes predicting a small budget surplus for 2013 which is set to expand next year on the back of the upturn.

"This surplus must be used wisely," said Roland Doehrn of the RWI.

After Germany`s September 22 elections, the economists also called for investment in infrastructure, research and education but pointed out that economic policy depended on the future government.

Chancellor Angela Merkel and her conservatives were on Thursday locked in further discussions with their defeated centre-left rivals, the Social Democrats (SPD), on whether to launch negotiations to form a grand coalition.

A key sticking point is the issue of a minimum wage.

The DIW`s Ferdinand Fichtner described as economically "harmful" the Social Democrats` demand for an hourly national minimum wage of 8.50 euros (USD 11), while Kai Carstensen, of the Ifo, judged it not a "good instrument" of social policy.

The institutes also said they did not recommend increasing taxes, like the SPD is calling for those in the top wage bracket.

The German government is expected to release its own updated growth forecasts next Wednesday.