BERLIN, April 15 - Germany's six top economic think tanks slashed their 2003 German growth forecast to 0.5 percent in a report on Tuesday and called for more action from Berlin to reform Europe's biggest economy. "The German economy remains in a phase of prolonged weakness," the institutes said in their twice-annual economic report. "An economic recovery may only be expected to start in Germany in the second half of this year. It will proceed only slowly however. All in all real GDP will rise by 0.5 percent this year," they said in their spring report.
The institutes said they based their forecasts in the report on the assumption the Iraq situation would calm down early this year and that oil prices would average $25 per barrel. The outlook compares with their forecast for GDP growth of 1.4 percent in October last year. Germany's economy grew 0.2 percent in 2002. The institutes forecast Germany's budget deficit will be 3.4 percent of gross domestic product this year, busting the European Union's three-percent limit for a second year in a row. In 2002 the deficit was 3.6 percent. "It is important to announce concrete steps as to how the goal of budget consolidation is to be achieved. The institutes agree on the goal of a balanced budget in the medium term. They also emphasise that budget consolidation should be achieved via the expenditure side," they wrote. The institutes said government efforts to lift Germany's growth potential by cutting welfare benefits and liberalising the labour market, dubbed "Agenda 2010", could only be a starting point for more concrete reforms.
"The measures announced in the 'Agenda 2010' point in the right direction. But they can only be a beginning." Even these reforms have been fiercely contested by the government's own supporters, making it unclear if they have a chance of becoming law. The main problems facing the German economy were that capacity utilisation remained low while unemployment surged. A global improvement would help exports and there would be stimulus from an expansionary monetary policy by the European Central Bank, although this would be countered by the fact the euro's rise since the start of 2003 had made German goods five percent more expensive.
The institutes said they expected the euro to remain steady this year and next around 2004, and for the negative impact of the past appreciation to wear off during next year. "Although the recovery will firm next year and domestic demand will rise slightly, economic growth in Germany will still lack dynamism in 2004," the report said. If forecast growth of 1.8 percent next year, partly due to calendar effects such as the fact 2004 is a Leap Year and more public holidays will fall on weekends. Together the holiday impact was worth 0.6 percentage point of the total rise in GDP. The institutes expect unemployment to average 4.45 million this year, compared with the government's official forecast of 4.14 million, and forecast the government will have to transfer more money than last year to the Federal Labour Office. Unemployment is seen rising further in 2004, averaging 4.5 million. In 2002 the government was forced to subsidise unemployment payments to the tune of 5.6 billion euros and had planned to cut that to zero this year.
The institutes also expect the European Central Bank to cut rates by a quarter of a percentage point in the coming weeks to help support the euro zone economy and then keep rates steady until the second half of next year. The institutes expect the wider euro zone economy to grow 0.9 percent this year and 2.3 percent in 2004, compared with growth in the United States of 2.4 and 3.5 percent respectively.//