Germany Rebounding in Face of Europe Debt Crisis, Institutes Say: Economy

Germany is experiencing an upswing that will help drive down unemployment and narrow the budget deficit even as the European debt crisis continues to pose the biggest threat to growth, the leading economic institutes said.

Europe’s biggest economy will expand 0.9 percent this year, up from a prior estimate of 0.8 percent, the four institute groups including Munich-based Ifo said today in their twice- yearly economic outlook for Chancellor Angela Merkel’s government. The economy will grow 2 percent in 2013, they said.
“Growth impulses in the German economy will win the upper hand” from mid-year after showing weaker expansion in the first half, said the institutes, citing low interest rates, falling unemployment and steady growth in demand for its products. Germany will exploit its attractiveness as a “safe investment harbor” as doubts over the crisis prevail.

The report underscores the growing disparity between Germany and the rest of Europe as the debt crisis resurfaces to buffet Spain and Italy. Merkel’s Cabinet approved budget projections yesterday that showed Germany will effectively eliminate its deficit in 2014, two years ahead of a deadline set in the constitution. That contrasts with Italy, which pushed back its balanced-budget goal by a year the same day.

Measures adopted by the European Central Bank to curb the “unresolved” debt crisis, aimed primarily at preventing the insolvency of states in southern Europe, are a little recognized boon to the German economy, the institutes said.
ECB Liquidity

The ECB’s liquidity measures and its 1 percent benchmark interest-rate are helping German companies leverage their competitive advantages over their partners in Europe, they said. Based on comparative costs, German companies are their most competitive in 30 years, the group said.

Unemployment will continue to decline in Germany, falling to 2.8 million in absolute terms this year and 2.6 million in 2013. Social insurance paid by the employed will cut contributions made by the government and help push down the deficit to 0.6 percent of gross domestic product this year and 0.2 percent in 2013, they said.

At the same time, the ECB’s policy of buying sovereign bonds in its Securities Markets Program and offering more than 1 trillion euros ($1.3 trillion) in low-interest loans in its Long Term Refinancing Operation has created a situation in which the bank’s capacity to curb inflation is being compromised, according to the institutes.

The measures pander to the euro-area’s weakest economies, meaning it may not be able to “act appropriately” in combating inflation, the group said. Still, the group said it shares the bank’s outlook on inflation. Consumer prices in the euro area will probably average 2.3 percent this year and 2.2 percent in 2013, making it likely that the ECB will keep its benchmark rate of 1 percent on hold to the end of 2013, the group said.

The forecasters group comprises the Ifo institute in Munich, the ETH instate Zurich, the ZEW unit of Mannheim University, the IW-Halle institute, Kiel Economics, IHS Vienna and the Essen-based RWI institute.