LONDON (MNI) – Leading indicators suggest a “rather favourable”
first quarter for German growth, once the effect of the cold weather on
the economy has passed, Bundesbank President and European Central Bank
Council Member Axel Weber says in a speech here tonight.

“The cyclical upswing is still intact. The most recent figure is
biased to some extent by the heavy snowfalls and extremely cold weather
in December. In line with this picture of a stronger underlying dynamic,
leading indicators suggest a rather favourable outcome for the first
quarter of 2011″.

“We are seeing a strong economic recovery in some countries,
particularly in Germany,” Weber said, but noted weakness in certain
peripheral economies of the zone, blaming ‘persistent structural
problems’.

Weber said that the German upswing “has recently gained in
breadth”, with external demand now having a much bigger impact on
domestic activity than in the past.

“Corporate investment has increased significantly. Capacity
utilisation is continuing to rise and is now back at its long-term
average. As a result, firms are becoming more and more willing to expand
their capacities rather than just replace existing equipment. Housing
construction is expected to go on benefiting from historically low
funding costs, whereas public investment is expected to drop sharply
given the phasing-out of stimulus programmes and the considerable need
for consolidation”.

The result of all this, Weber warned, is that the “price climate
has … deteriorated”.

“Although it should not be forgotten that,” he added, “up to now,
this has been due mostly to exogenous shocks, particularly from energy
prices”.

Weber said he expected the German economy to grow “considerably
faster” in 2011 than the 2% projected in December — “2.5% should be a
realistic figure as things stand at present”.

German potential growth had suffered through the crisis and it
would only recover slowly” — to no more than 1% by 2012″.

The Bundesbank head said that the German economy should make
up its crisis-related output losses by the end of this year.

Very positive household sentiment suggested that the uptrend
would get stronger this year and in 2012, with the improved labour
market situation and expectations of better pay driving this
improvement.

Weber also noted that the German public finances were likely to
benefit further from this strong economic upswing, with the deficit
falling further this year:

“For the current year, we consider it feasible that there will be a
further decline in the deficit ratio in the order of 2%, provided that
fiscal policy stays committed to consolidation”.

While Weber insisted that the euro would survive, he called on EU
leaders to agree a substantial package of governance reforms at their
meetings this month:

“The stabilisation measures have nevertheless shaken the
foundations of EMU. It is therefore vital that European leaders take the
right decisions during the next few weeks when it comes to overhauling
the governance of the European monetary union. The final package should
not fall short of what was agreed by policymakers at the end of last
year”.

–London newsroom: 0044-207-862-7492: email: ukeditorial@marketnews.com

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