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Business

German Government's Economic Experts Cautious on Growth

Germany is set to breach the EU's budget rules for the fifth year in a row in 2006 as growth remains sluggish, the government's so-called "Five Wise Men" said in their latest forecast published on Wednesday.

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What's in store for Germany?

The German economy is set to expand by 0.8 percent this year and then only slightly faster by 1.0 percent next year, the economic advisors to the government forecast in their latest annual report.

The panel, which actually comprises four men and one woman, is therefore slightly more cautious on growth than Berlin itself, which is officially penciling in growth of 1.2 percent next year.

And the slow rate of growth would mean that the state of the country's public finances would remain very tight, the experts said.

"In the current year, German growth remained subdued," the Five Wise Men found.

Domestic dema n d still the problem

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While the external trade environment was favorable, the positive impulses from exports did not spring over to domestic demand.

"The registered number of unemployed rose once again and the budget situation remained precarious," the panel said. And next year, the economy "is not expected to develop very dynamically either. At 1.0 percent, growth will again be too weak to bring about any lasting improvement on the labor market."

The persistent weakness of growth was attributable partly to high energy prices, which will further undermine private households' purchasing power next year, they said.

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"The lack of dynamism, in particular on the labor market, shows that Germany continues to suffer from deep-seated economic problems," the report continued. "Even if progress has been made in recent years ... the process of economic reform must continue."

War n i n g agai n st raisi n g sales tax

As the incoming government under chancellor-to-be Angela Merkel tries to put together a program of reforms to get the German economy back on its feet, the Wise Men warned Berlin not to seek to plug the gaping holes in Germany's public purse by raising the sales tax, as is highly likely.

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Will Germany manage to comply with euro zone rules in 2006?

The experts also said that Germany could still comply with the euro zone's Growth and Stability pact in 2006. The pact requires members to keep the deficit below 3 percent of GDP. Germany breached this rule in 2002, 2003 and 2004 and is expected to do so again this year.

"Savings of around six billion euros ($7 billion) would suffice," they wrote. "The goal is still achievable."

The savings could be achieved by abolishing or lowering tax breaks and subsidies, such as those for own-home purchase, commuting, and Sunday, holiday and night shifts, the experts suggested.

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