BERLIN (MNI) – The International Monetary Fund in its latest staff
report released Tuesday forecast German GDP growth of 1.2% in 2010 and
1.7% in 2011.

“The recovery underway is likely to be moderate, with predominantly
downside risks,” the IMF noted in its report. It “remains fragile
because of mostly downward risks for export and credit growth.”

Muted Eurozone economic growth and the restraint of U.S. consumers
will limit Germany’s export growth, while domestically consumers will
remain cautious given the expected increase in unemployment and moderate
income gains, the IMF reasoned. GDP growth could also be lower because
of setbacks to world trade or the domestic financial system.

For the moment “there is little clear evidence of a credit crunch
at the current juncture,” the report remarked. Corporate credit has
declined broadly in line with GDP, suggesting that demand factors have
been at play, too.

Yet, with looming bank write-downs and pending regulatory demand
for additional capital, the IMF is concerned “that credit supply could
run short when the recovery matures.”

While losses from securitized products have likely reached their
peak, additional write-downs on non-performing loans, which follow GDP
growth with a lag, could be significant, it pointed out.

“Weaknesses of bank balance sheets could therefore hinder the
recovery,” the report asserted. IMF staff analysis suggests that
negative shocks to credit supply would have large and lasting effects on
real economic activity, in particular on investment and private
consumption.

“Thus, the possibility of a credit crunch is an important downward
risk to the recovery,” it warned.

Unemployment is projected to increase as firms adjust to the
reality of lower post-crisis growth and government subsidies for
short-time work lose their allure.

Rising unemployment, and the increased employment uncertainty
created by it, will have a dampening effect on consumption, as
households deal with income losses or spend more cautiously to prepare
in advance for them, the IMF predicted. This effect is exacerbated by
the expected low wage growth during 2010, it added.

Inflation is seen continuing its gradual rise from the very low
levels reached recently. With the level of actual output substantially
below potential, German HICP inflation is projected to increase only
slowly, averaging 0.9% in 2010 and 1.0% in 2011.

The 2010 budget continues to provide economic stimulus during a
still fragile recovery, the Fund observed. Consequently, the fiscal
position of Germany has weakened markedly.

The total public deficit is projected by the IMF to increase to
5.7% in 2010 — nearly twice the deficit limit set by the EU’s Stability
and Growth Pact. In 2011, the Fund sees the deficit only falling
slightly to 5.1%.

The increased deficit reflects the additional budget measures, the
fiscal consequences of an anticipated weakening of the labor market, and
cyclically weak tax revenue. Taking into account the fiscal costs
associated with the financial sector support packages, the gross debt
ratio is set to rise to 76.7% in 2010 and to 79.5% in 2011, the IMF
forecast.

With the recovery expected to firm up by 2011, the government is
committed to fiscal consolidation, not least to anchor fiscal policy in
the Eurozone, the report remarked. But strong measures will be needed to
meet the requirements of the Stability and Growth Pact as well as the
national deficit rules in the medium term, it pointed out.

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

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