Instead of building on last year's recovery, the German economy appears to be heading downhill again. On Tuesday, the country's top economic institutes slashed their growth forecast for 2005.
After a slight upturn, Germany's economy is dropping off again
The outlook for Germany's stuttering economy has become decidedly gloomier following the decision by six leading economic institutes to halve their growth forecast for the eurozone's biggest economy this year.
The institutes slashed their 2005 growth forecast to just 0.7 percent from 1.5 percent, heralding tough times for the government, which is eager to cut unemployment and get its public finances in order ahead of the general election next year.
But the institutes' gloomy report is in line with the latest forecasts by the International Monetary Fund and the European Commission, which are both pencilling in German growth of a meager 0.8 percent this year.
"The German economy finds itself in a spot of economic weakness this spring," the institutes said. "The strong recovery observed in the first half of 2004 has come to a standstill."
Opposition: a government of "mini-growth"
In 2004, the German economy had expanded by 1.6 percent, a substantial improvement on the previous year's lacklustre 1.1 percent, largely thanks to the increased number of working days. Those positive calendar effects are set to be reversed this year. In addition, global growth has slowed tangibly and the strong euro was weighing on German exports, previously the main driver of growth.
Exports are down due to the weak dollar and strong Euro
"The impulses from domestic demand remain weak and are unable to offset the easing of export growth. So the general weak economic trend remains intact," the institutes diagnosed.
The news was met with fierce criticism from the opposition, which attacked Chancellor Gerhard Schröder's coalition government with of Social Democrats and Greens for failing to revive the economy.
"Red-Green remains the government of mini growth," said Rainer Brüderle, the deputy leader of the market-oriented Free Democratic Party. "The upturn is over before it's even begun."
Weak domestic economy
No improvement was in sight in domestic demand given the high level of unemployment and with growth set to remain only sluggish, no substantial improvements could be expected on the labor market in the near future, the institutes said.
The jobless total, which stood at 4.381 million or 10.2 percent of the workforce in 2004, was expected to average 4.844 million this year, equivalent to a jobless rate of 11.1 percent. And next year, it would come down to 4.518 million or 10.4 percent, the institutes predicted.
The combination of weak growth and high unemployment also signalled bad news for Germany's public finances.
The institutes predicted that the German public deficit would again breach European Union limits both this year and next year.
"The crisis in the labor market slows our economic growth," said Axel Nitschke, chief economist at the German Chambers of Industry and Commerce, the DIHK. "The government cannot let the appeal by the research institutes to fall on deaf ears."
Bad news, but signs of hope
The institutes said they expected the German public deficit to amount to 3.4 percent of GDP this year and 3.3 percent in 2006, breaching the 3.0-percent limit laid down in the EU's Stability and Growth Pact for the fourth and fifth years running.
The government had vowed to bring the deficit ratio back below 3.0 percent this year. Nevertheless, the institutes said that the current weak economic phase "will gradually be overcome during the course of the year."
High oil prices, currently a damper on the economy's growth, are likely to recede and aid a recovery before the end of the year
The effects of high oil prices would disappear and global growth was set to pick up speed again, which would be good news for exports. Low interest rates will also fuel domestic demand, adding to the momentum, according to both the institutes and the government.
"Impulses will come from exports, but they will also gradually feed through to the domestic economy," Economy and Labor Minister Wolfgang Clement said in a statement.
In addition, the government's labor market reforms and other structural reforms would begin to bear fruit and Berlin would press ahead with further reforms in order to strengthen growth prospects in medium-to-long term. The government's current official growth forecast for this year stands at 1.6 percent. But it is expected to revise it downward sharply on Friday, with press reports mooting a figure of around 1.0 percent.