German growth will slow sharply this year, the government said today, but vowed Europe's top economy would dodge recession despite the ongoing euro zone crisis and weaker demand from emerging markets.
Berlin slashed its forecast for output in 2012 to 0.7% from a previous estimate of 1% but predicted that Germany would rebound next year to expand by 1.6%.
Nevertheless, Economy Minister Philipp Roesler insisted: "There can be no talk of recession."
He said the economy likely shrank by 0.3% in the final quarter of last year but expected "moderate" growth of 0.1% in the first quarter of 2012, avoiding recession. A recession is defined as two consecutive quarters of negative growth.
"Germany is and remains an anchor for stability and growth in Europe," the minister said as he presented the twice-yearly government forecasts.
"After two extraordinarily strong growth years, the German economy is still in robust form. However, due to a difficult external environment, we are expecting a temporary dip in growth in the first half of the year," he said.
"Nevertheless, we are firmly convinced that the German economy will find its way back to a strong growth path in the course of the year," the minister said. The "main risk" for growth in 2012 is "without doubt a worsening of the crisis in Europe," the minister said.
He said the projections were based on the assumption of a relaxation in market tensions and a rapid solution to the euro zone debt crisis.
The German economy suffered badly during the 2008 global financial crisis, registering its worst recession in six decades. But due to multi-billion-euro growth packages ploughed into the economy and a scheme allowing workers to reduce their hours while keeping their jobs, Chancellor Angela Merkel managed to keep a lid on unemployment and growth rebounded strongly.
After shrinking by around 5% in 2009, Germany marked record growth of 3.7% in 2010 and continued to grow at a decent pace of 3% last year.
However, even Germany's resilience could not withstand a euro zone crisis that has threatened to tip the 17-nation zone as a whole into recession, economists say. Nonetheless, unemployment remains near record lows and forward-looking data from Germany continues to surprise analysts, with this week's ZEW survey of investor confidence soaring on hopes of a quick end to the eurozone turmoil.
Roesler said that despite the slowdown in growth, the German economy would continue to create jobs, with 220,000 new positions likely this year. And, as Germany pushes fellow euro zone countries to implement painful austerity measures, the minister said that Germany's public deficit would shrink to 1% in 2012, way below EU limits.
After years of criticism against Germany that it was over-reliant on exports, there are increasing signs that the economy is becoming more balanced.
"The growth dynamic in 2012 will come exclusively from domestic demand. Private consumption will support the German economy significantly," Roesler said. "This will strengthen the resistance of the German economy from outside influences," he added.
He said weaker growth in emerging markets had already been included in the forecasts.
Germany pays record low amount at latest auction
Germany paid a record low rate at an auction of two-year bonds today amid solid demand, suggesting investors are still snapping up the lower-risk debt issued by Europe's top economy.
Germany received bids for €7.6 billion worth of two-year paper and placed only €3.44 billion, suggesting the auction was oversubscribed twice over.
The average yield, or rate of return on the bond, was a record low 0.17%, showing investors are prepared to earn almost nothing for parking their money in the safe haven offered by Germany amid market uncertainty. A previous auction of two-year bonds produced an average rate of 0.29%.
The strong auction was the latest in a series of positive debt sales in the crisis-wracked euro zone that has given investors cheer despite Friday's downgrade of several nations' credit rating by Standard and Poor's.
Germany is one of only four euro zone countries - the others being Finland, Luxembourg and the Netherlands - that continue to enjoy a top triple-A rating from S&P after the downgrades.
But Germany's safe-haven status was called into question in November, when an auction of 10-year debt attracted minimal demand, sending markets into tailspin. At that time, Germany received bids for only €3.9 billion worth of Bunds, despite offering €6 billion.
Since then, Germany has enjoyed strong demand for debt of all maturities. In January, the rate paid to investors for a six-month bond turned negative for the first time ever, meaning they were effectively paying Germany to stash their money in a safe place.
Ratings firm Egan-Jones downgrades Germany
US ratings firm Egan-Jones cut its rating on Germany a notch this evening, citing the burden of the eurozone debt crisis on Europe's biggest economy.
Egan-Jones Ratings Co said it had lowered its rating on Germany from AA to AA- and placed it on a negative credit watch.
The action was taken "because Germany will be footing a significant portion of the bill for the EUs problems and it will hurt credit quality," Sean Egan, the firm's managing director, said in an email to AFP.
Still, the interest rates Germany must pay to borrow "are likely to remain low," he said, because Germany is among the strongest countries in the European Union and has benefited from the European Central Bank's efforts to pump liquidity into the euro zone.
"However, investors have already been hurt by the decline in the euro and the overhang from increased overall debt," Egan added.
In its rating analysis, Egan-Jones noted that Germany has been shouldering the burdens of other EU countries through its exposure to the European Financial Stability Facility (EFSF), a financial rescue fund.
In addition, Germany has been indirectly strained by the European Central Bank's "hefty exposure to the weaker banks and the weaker sovereign credits," the document said.
Bigger US ratings rival Standard & Poor's on Monday downgraded the EFSF. On Friday it downgraded nine EU countries, stripping France and Austria of their prized AAA ratings.
But Egan-Jones had been the first ratings agency to downgrade France. In December it lowered the rating on Europe's second-largest economy by two notches, from AA- to A.
