BERLIN (MNI) – The European Commission said Monday it expects that
the German upswing will be largely sustained beyond this year,
forecasting GDP growth of 3.7% in 2010, 2.2% in 2011 and 2.0% in 2012.

“The initially predominantly export- and inventory-driven recovery
has given way to a broad-based upswing,” the Commission stated in its
autumn forecast report.

Even though export dynamics are assumed to slow down after the
growth spurt this year, the economic upswing is expected for the most
part to maintain its momentum, the Commission said.

“Fiscal consolidation will start in 2011, but is likely to imply
only a limited moderation of growth,” the report asserted.

With a “vibrant” labor market and favorable financing conditions,
domestic demand can be expected to react much more dynamically to the
export-led upswing than was previously the case, the Commission
reasoned.

“This would also lead to a more balanced growth composition and
imply a steady decline in the current-account surplus,” the report
remarked.

Next to the strong labor market, a pick-up in wage growth and
still-contained inflation will boost private consumption, the Commission
predicted.

The household savings rate is not expected to rise any further and
hikes in social security contributions and other fiscal consolidation
measures are projected to moderate private consumption growth only
temporarily in the beginning of 2011, it said.

Rebounding strongly in 2010, investment is projected to remain
“buoyant” over the coming years, the Commission asserted, also supported
by a decline in real interest rates.

Many companies had put investment plans on hold during the crisis,
the report observed. Given the stronger-than-expected rebound, many of
these projects are now being implemented, it said.

Given the rising import content of German exports and a noticeable
pick-up in domestic demand, imports are projected by the Commission to
grow faster than exports in 2011 to 2012.

“As a result, the growth contribution of net exports would move
close to zero and the balance of trade in goods and services would
gradually approach a surplus of around 4.25% by 2012,” the Commission
forecast.

“However, a sharper-than-expected deceleration of foreign demand,
disruptive exchange rate developments or a surge in protectionist
tendencies pose downside risks to the current growth outlook and could
imply a setback to the ongoing recovery,” the report cautioned.

Due to Germany’s shrinking population, the projected strong labor
demand could lead to shortages at least in certain sectors and
especially for high-skilled workers, the Commission pointed out.

“This will imply stronger wage pressure, but can also become an
increasingly important bottleneck to growth and constitutes a
non-negligible risk factor for the growth outlook,” it warned.

Recent wage agreements already point to a pick-up in
collectively-agreed wage rates from 2011 onward, the report noted.
Nominal unit labor costs are projected by the Commission to rise by
around 1% per year in 2011 and 2012.

German HICP inflation is projected to pick up from next year
onwards but to still remain relatively contained at around 1.8% in 2011
and 2.0% in 2012 after a projected rate of 1.1% in 2010.

Higher inflation in 2011 reflects in particular a hike in energy
prices due to lagged effects from higher oil prices in 2010 and higher
electricity prices, the report observed. Rising wage pressures and a
progressive closing of the output gap are also expected to contribute to
somewhat higher inflation in 2012.

The country’s general government deficit is projected to increase
from 3.0% of GDP last year to 3.7% this year, still driven by the
measures undertaken to support the economic recovery, the Commission
said.

In 2011, the general government deficit is forecast by the
Commission to diminish to 2.7% of GDP benefiting from more favorable
cyclical conditions and fiscal consolidation measures. The deficit is
set to decline further to 1.8% of GDP in 2012, it said.

Gross debt is projected to increase from 73.4% of GDP in 2009 to
75.7% in 2011, also due to the asset transfer from one of the
Landesbanken into a bad bank, the report stated. The debt-to-GDP ratio
will fall to 75.2% in 2012, mainly due to a favorable denominator
effect, it said.

The establishment of further bad banks, though, might additionally
burden Germany’s public finances in the short- and medium-term, the
Commission cautioned.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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