German government advisers cut 2013 growth forecast

Monday 25 March 2013 17.33
German 'wise men' predict growth of just 0.3% this year
German 'wise men' predict growth of just 0.3% this year

Economic advisers to the German government have more than halved their forecast for 2013 growth.

They blamed a sharp fourth-quarter contraction and weak prospects for foreign trade and investment.

The advisers, known in Germany as the "wise men", predicted the economy would almost grind to a halt this year, growing just 0.3% compared to 0.7% in 2012.

In October they had forecast that Europe's largest economy would expand 0.8% in 2013, but data has since shown that it shrank by 0.6% in the last three months of 2012.

Foreign trade, traditionally the main driver of German growth, would subtract 0.3 percentage points from German gross domestic product (GDP) this year, the advisers said.

Demand for Germany's goods has weakened as austerity measures and recession take their toll on demand in other members of the euro zone, where Germany sends 40% of its shipments.

The advisers said investment was unlikely to make any significant contribution to growth in the first half of 2013. They see capital investment dropping by 3% over the year, a slight improvement compared with 2012, when firms invested 4.8% less in machinery and equipment.

Some German companies are making cuts, with Air Berlin, the country's second biggest carrier, saying it would focus on savings this year. And retailer Metro said it would reduce overall investment in the shortened 2013 year to below the €954m it put into its business in the first nine months of 2012.

The German advisers said growth would primarily come from domestic demand, with private consumption increasing by 0.7% and government spending rising by an upwardly revised 1.7%.

''Especially household final consumption expenditure should continue to display a robust development, given that the labour market is still remarkably stable," the advisers said in a statement.

Germany's jobless rate is close to its lowest since the country reunited more than two decades ago and the number of Germans out of work fell in February. In addition, inflation is moderate, wages are rising and paltry interest rates are giving consumers little incentive to save.

Data due out later this week is expected to bolster the advisers' expectations by showing that the number of unemployed Germans fell by 4,000 in March and consumer sentiment held steady heading into April.

The influential Ifo survey last week showed German business morale fell in March, breaking a four-month run of gains and highlighting concerns the reignited debt crisis in the euro zone will test Germany's resilience.

Consumer price inflation will ease to 1.7% this year from 2% last year and the unemployment rate will edge up to 6.9% from 6.8%, the advisers said, which is still near post-reunification lows.