The German economy, which grew strongly earlier this year on the back of robust exports, will see a slowdown in growth in 2005 as a result of runaway oil prices and a tailing off of foreign demand for German-made goods, top research institutes said today.
In their traditional autumn report, Germany's six leading institutes actually revised upwards their growth forecast for the current year to 1.8% from 1.5% previously.
But five of the think-tanks - Ifo in Munich, HWWA in Hamburg, RWI in Essen, IfW in Kiel and IWH in Halle - said they expected growth of the euro zone's biggest economy to slow to 1.5% next year. Only Berlin-based DIW was more optimistic, pencilling in growth of 2% in 2005.
The pick-up in activity in the German economy since the beginning of this year has been attributed in part to the fact that a large number of public holidays in 2004 have fallen on weekends. But that effect is set to be reversed in 2005.
Growth impulses were coming solely from abroad 'and they haven't yet jumped over to domestic demand, which has remained weak for an unusually long time', the institutes said.
And since 'the global upturn, particularly in the US and in China is losing speed, the impulses for the German economy coming from exports can be expected to weaken', they said.
Oil prices, in particular, constituted a 'special risk' for the global economy, since they will put the brakes on private consumption, the institutes warned.
Any improvement in household spending in Germany arising from positive effects of tax cuts and an improvement in the labour market would remain 'modest', the institutes warned. And unemployment was set to come down only slowly, with the jobless rate expected to average 10.1% in 2005, only fractionally lower than an anticipated 10.2% this year.
As for the state of German public finances, the institutes forecast a renewed breach of the terms of the European Stability and Growth Pact by Germany next year. The stability pact stipulates that eurozone countries must keep annual public deficits to 3% or less of gross domestic product.
However, the German deficit ratio already exceeded that limit in 2002 and 2003 and is set to reach 3.8% again this year. The institutes forecast a deficit ratio of 3.5% for 2005 and urged the goverment to cut spending more aggressively next year in order to bring the deficit back within EU limits.
