European Economies: German Institutes Cut 2005 Growth Forecast
European Economies: German Institutes Cut 2005 Growth Forecast
April 26 (Bloomberg) -- Germany's six leading economic institutes cut their forecast for growth this year in half as oil prices at $50 a barrel crimped consumers' spending power and unemployment rose to a post-World War II record.
Germany's economy, Europe's largest, will expand 0.7 percent in 2005, the institutes said today, slashing their October forecast of 1.5 percent. Growth will accelerate to 1.5 percent next year, the state-funded institutes said in their twice-yearly report, presented in Berlin.
``The economy's underlying weakness is continuing,'' Joachim Scheide, chief economist of the Kiel Institute for World Economics, said at a press conference in Berlin today. ``Almost no other European country has, in recent years, posted a development that was equally unfavorable. The German economy is obviously suffering from fundamental weakness.''
Germany is forecast by the European Commission to be the slowest-growing economy in the entire 25-nation European Union this year. Business confidence dropped to a 19-month low in April, the Ifo institute, one of the six, said yesterday. The unemployment rate rose to 12 percent in March, clouding prospects for a recovery in consumer spending.
The institutes' forecast, which forms the basis for the government's own revised outlook to be issued April 28, is lower than separate projections of 0.8 percent published earlier this month by both the commission and the International Monetary Fund.
Popularity Slump
Germany's anemic growth and increased unemployment have contributed to a slump in popularity for Chancellor Gerhard Schroeder's Social Democratic Party this year. A Forsa poll of 2,503 voters conducted from April 11 to 15 for Stern magazine put the Social Democrats on 28 percent, a seven-month low. The main opposition Christian Democratic Union was on 46 percent.
Germany's benchmark DAX 30 stock index fell 30.44 points, or 0.7 percent, to 4216.52 at 12:19 p.m. in Frankfurt. The index has is down 0.8 percent so far this year, compared with a 2 percent increase in the Dow Jones Stoxx 50 Index benchmark for Europe and a 4 percent gain in France's CAC 40.
Munich-based Infineon Technologies AG, Europe's largest maker of semiconductors, today reported a fiscal second-quarter loss and said it sees no ``major improvement'' in demand this quarter. Lanxess AG, Germany's fourth-largest chemical maker, said it may cut as many as 1,200 jobs as it struggles to revive profit growth. Puma AG shares fell as much as 2.9 percent as the Herzogenaurach, Germany-based company reported falling European orders.
Turnaround Delayed
``The economy is expanding but at a level that's far too low to encourage companies to boost investments or hiring,'' said Bert Ruerup, head of Schroeder's panel of economic advisers, in an interview today. The slow pace of growth ``will delay any turnaround in employment until next year.''
The IMF expects Germany to have the weakest growth of the Group of Seven leading industrialized nations along with Japan, expanding at less than a quarter of the pace of the U.S., where the fund predicts growth of 3.6 percent.
That growth gap and resulting difference in interest rates has been reflected in the currency market this year. The euro fell for a second day against the dollar today and was down 0.2 percent at $1.2979 at 11:50 a.m. in Frankfurt. The currency has fallen 4.4 percent from the record $1.3666 reached on Dec. 30. The 10-year German bond yield was 1 basis point shy of a record low.
The institutes said the oil price, which reached a record $57.65 a barrel on April 4, will damp export growth in the first half before improving global growth boosts demand for German goods in the second half of the year, leading exports to expand 4.1 percent in 2005 and 6.4 percent in 2006. The cost of oil is forecast to average at $50 a barrel this year and $48 in 2006.
Jobless Forecast
Germany's economy may have expanded 0.5 percent between January and March, recovering from a contraction in the fourth quarter of last year, Scheide said. First-quarter figures will be released May 12.
German unemployment, adjusted for seasonal swings, may not fall until the second half of the year, Economy and Labor Minister Wolfgang Clement said in a statement today. The adjusted jobless total has risen for the past 14 months. Data for April will be released on April 28, and economists expect an increase of 10,000, according to the median of 37 forecasts in a Bloomberg survey.
Unemployment will benefit from stronger economic growth and rising investment in equipment next year and may fall by nearly 300,000 in unadjusted average terms to 4.52 million from an estimated 4.84 million in 2005, the institutes said.
Budget Gap
Still, with growth slowing and high spending on unemployment persisting, Germany may again fail to keep its budget deficit below the European Union's limit of 3 percent of gross domestic product this year and next, according to the report, which projected a shortfall of 3.4 percent in 2005 and 3.3 percent in 2006. Germany has failed to meet the 3 percent target since 2001.
``The state of public finances will remain tense even though the deficit may improve slightly,'' the institutes said.
Finance Minister Hans Eichel aims to nearly halve new government borrowing to 22 billion euros ($28.6 billion) this year from 39.5 billion euros in 2004. Opposition officials have said the government deficit, accounting for about half the national shortfall, may be 17 billion euros higher because of unforeseen jobless costs and tax-revenue shortfalls.
The German economy returned to growth in 2004, expanding 1.6 percent, after three years of stagnation. That hasn't boosted government revenue, which declined 0.1 percent in 2004, according to figures published by the Federal Statistics Office on March 29.
The European Central Bank, which has kept its benchmark interest rate at a six-decade low of 2 percent for almost two years, may raise rates to 2.5 percent over the course of next year, the institutes said.
Although ample money-supply growth and the ``very low'' level of interest rates would warrant an increase in borrowing costs now, the ECB may delay such a decision until next year when economic growth in the euro zone ``has firmed'' to 2 percent from an estimated 1.4 percent, the report said.
The six German institutes are Munich's Ifo; Kiel's Institute for World Economics; Halle's IWH institute; the RWI in Essen; Hamburg's HWWA institute and the Berlin-based DIW German Institute for Economic Research.
To contact the reporters on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.
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