Thinktanks raise German growth forecast to 1.9%

A group of four leading economic institutes raised their forecast for German growth in 2014 on Thursday, saying that Europe's largest economy would accelerate its growth thanks to strong domestic demand. In a joint report released on Thursday, the four institutes said German gross domestic product (GDP) would grow by 1.9 percent in 2014, higher than their previous forecast of 1.8 percent last autumn. Domestic demand would be the main driver, said the group of institutes, which include DIW in Berlin, Ifo in Munich, IW in Halle and RWI in Essen. "The German economy is experiencing an upturn in spring 2014," said the institutes, noting increasing output, number of new orders, improving employment situation, as well as sentiment among companies and consumers. Thanks to a recovering economy in the rest of eurozone, which is Germany's most important trading partner, external uncertainties continued to fade, despite the deteriorating demands from emerging markets. At the start of 2014, investment activity gained momentum, and construction was also boosted by a mild winter, said the institutes. They expected production to increase significantly during the rest of the year. Private consumption, bolstered by faster increase of disposable income and rising employment level, would make the biggest contribution, they said. Investment, driven by low interest rates, strong financial position of governments and a high level of confidence in corporations, would also stimulate growth, according to the thinktanks. "International trade, by contrast, is not expected to provide any impulse," read the report, citing larger increase in imports than in exports due to steep increase in investment. On Wednesday, German Federal Statistical Office said that German trade surplus continued to decline for the third consecutive month in February and stood at 15.7 billion euros (21.76 billion U.S. dollars), due to an unexpected drop of 1.3 percent in exports and growth of 0.4 percent in imports. The institutes expected a moderate inflation rate of 1.3 percent in 2014, and a balanced budget with surplus of 0.1 percent of GDP. They also forecast that in next year, the German economy would expand by 2 percent, driven mainly by strong domestic demand again. Meanwhile, three of the four institutes, except DIW in Berlin, warned that some of German center-left coalition government's policies, including lower retirement age and national minimum wage, would be "headwind" for the economy. The 8.5-euros-per-hour minimum wage, scheduled to be introduced on Jan. 1, 2015, would affect around four million employees and around 200,000 jobs would be initially lost, estimated the institutes. In their biannual report, the institutes also said that the tense situation in Ukraine was another uncertain factor for the outlook of German economy. European Union posed punishing measures including bank accounts freeze and travel bans to Russian officials and threatened further economic sanctions on Russia. Given the fact that Russia is the third biggest trading partner outside Europe for Germany and delivered 31 percent of crude oil and natural gas imported by Germany, some economists and companies remained worried that the German economy would be hurt if relations between EU and Russia continued to deteriorate. "Sanctions on cross-border trade in goods and capital, and especially limitations on Russian oil and gas exports, would have a serious impact on both Russia and Germany," said the institutes.