Clouds clear over German economy

Reuters: The economic skies above Germany appear to be clearing and the recovery of Europe’s top economy looks set gather momentum during the course of this year, the country’s leading economic think tanks said.

Germany has managed to avoid the recession that the eurozone’s long-running sovereign debt crisis has pushed many countries into. But economic growth nevertheless slowed to just 0.7% in 2012 from 3% the previous year.

However, the slowdown looks set to be short-lived, experts say. Four top institutes – Ifo in Munich, IfW in Kiel, IW in Halle and RWI in EssenBSE 4.90% - predicted in their annual spring report that gross domestic product (GDP) would expand by 0.8% in 2013 and then by 1.9% in 2014.

The forecast for the current year actually represented a slight downward revision from the institutes’ earlier prognosis of 1% in October. Economic activity had been muted in the first quarter, largely as a result of the cold winter weather, the think-tanks argued. But the institutes are nevertheless more optimistic than the government, which is pencilling growth of just 0.4% for 2013 and 1.6% for 2014. The government is scheduled to publish its own updated forecasts next week.

But Economy Minister Philipp Roesler took heart from the institutes’ report. “There is every reason to be optimistic about the future,” he said. “The German economy is overcoming its phase of weakness. Things are moving up. We now just to have stay on the ball,” Roesler said.

According to the institutes, “an upwards tendency re-emerged in the German economy in spring 2013. The situation in the financial markets has eased thanks to subsiding uncertainty regarding the future of the European Monetary Union. The headwind in the world economy has also tailed off somewhat.”

They added that “the expectations of companies and consumers have improved since autumn and both industrial production and world trade have picked up in recent months.” The banking and financial crisis in Cyprus “does not seem to have fundamentally changed this perception,” they said.

The institutes argued that conditions in the financial markets “have improved significantly since last autumn. Tensions in the euro area, which mounted in the first six months of 2012 after a renewed intensification of the government debt crisis, eased considerably.”

Stock markets have risen sharply since mid-2012 and recently hit long-term highs in several countries.

 “Conditions are ripe for a sharp increase in economic output,” the institutes said, pointing to low interest rates and the competitiveness of German companies. “In addition, the labour market in Germany remains robust. There are virtually no traces of the recent economic downturn in this market,” the report said.

Indeed, the downward trend in unemployment was set to continue, with the annual average jobless total projected to slip to 2.872 million this year and 2.717 million in 2014 from 2.897 million in 2012. That would bring the jobless rate down to 6.7% in 2013 and 6.4% in 2014 from 6.8 per cent last year.

Germany’s economic resilience would also have a positive effect on public finances, with the budget expected to be “almost balanced this year” after a slight surplus of 0.2% last year, the institutes predicted.

And next year, “the public budget situation will continue to improve and the state should post a surplus of 0.5% related to gross domestic product, mainly thanks to more favourable economic conditions,” the institutes said.

“Uncertainty hangs over this forecast due to the parliamentary elections scheduled to take place in September 2013,” they nonetheless added.