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14 April 2024

German growth forecasts slashed for 2008

By Agencies



Two leading German economic think tanks cut their growth forecasts for Europe's largest economy this year and next on Thursday, saying weaker investment and a U.S. slowdown would crimp growth in 2008.

The Ifo research institute forecast growth of 2.5 per cent this year and 1.8 per cent next year, trimming predictions it made jointly with other think tanks in October for growth of 2.6 per cent and 2.2 per cent in 2007 and 2008, respectively.

"In the coming year, the expansion rate of overall economic output should weaken further, because investment activity will be depressed by the bringing forward of projects into 2007," Ifo said in a report entitled "Economy losing speed".

Changes to provisions for writing off company outlays against tax in 2008 are expected to act as a dampener on German investment next year. Last year, the German economy grew by 2.9 per cent - its fastest rate in six years.

The Frankfurter Rundschau newspaper reported that the Bundesbank had also cut its 2008 German growth forecast to 1.6 per cent from 2 per cent previously. The Bundesbank had no comment on the report, which cited sources in Berlin and Frankfurt.

Ifo said its latest forecasts were laden with risks. It made the forecasts on the assumption that the price of Brent crude oil would trade around $90 a barrel, and that the euro would fluctuate around $1.45.

Some German companies say the strength of the euro, which hit a record high of $1.4968 last month, is hurting business.

The Kiel-based Institute for World Economy (IfW) said the strong euro was hitting German firms' price competitiveness.

"The economy is again facing headwinds," the IfW said. "We expect a dampening effect from weakening in the U.S. economy, diminished price competitiveness and the high oil price."

The IfW pared its forecast for German economic growth in 2007 to 2.6 per cent from a September prediction of 2.7 per cent. The institute also cut its forecast for growth in 2008, to 1.9 per cent from 2.4.

The OECD's chief economist told Reuters in an interview last week the euro's rise was not as dramatic as is often made out.

Despite the firm euro, German exporters sold a record value of goods abroad in October. Carmaker BMW said last Friday its group vehicle sales rose 13.2 per cent in November.

"Despite the difficult market conditions, we are approaching the target for 2007 at top speed," said Stefan Krause, BMW board member responsible for sales and marketing. (Reuters)