BERLIN (MNI) – The Organization for Economic Growth and Development
in its latest Economic Survey released Wednesday raised its forecast for
German GDP this year and next to +2.0% and +2.1%, respectively, from the
+1.3% and +1.9% it had projected in March.

On a workday-adjusted basis, the OECD put German GDP in 2010 and
2011 at +1.9% and +2.1%, respectively, up from +1.1% and +1.9%.

The underlying growth momentum in the country remains intact even
though negative one-off effects — such as a significantly negative
contribution from stock-building and adverse weather conditions —
affected the economy around the beginning of the year, the OECD
remarked.

“Growth is expected to pick up strongly from the second quarter
onwards as the improvement in world trade continues and firms gradually
raise their investment expenditures,” the association said.

As in past upswings, the growth rebound will be mainly driven by
foreign trade as Germany regains export market share lost during the
crisis, the report notes. As a result, the country’s current account
surplus is projected to widen again.

Stock-building is expected to add significantly to growth in 2010,
while private consumption is projected to remain weak as the labor
market deteriorates and households possibly save some of the additional
income they receive through tax cuts.

The OECD sees Germany’s private investment following the
improvement in trade, but only with a lag since capacity utilisation
remains at low levels.

Public investment will continue to contribute to growth in 2010
since infrastructure spending from the fiscal stimulus programs will be
phased out only next year, the report notes.

In 2011, both private consumption and investment are expected to
return to past positive growth trends. Yet a sizeable output gap will
still remain at the end of next year. Price pressures in the country
will, thus, remain contained, the OECD asserted. It forecast annual HICP
inflation rates in Germany of 1.3% in 2010 and 1.0% in 2011.

Employment has been stabilised so far by increased flexibility in
working-time arrangements at companies and, to a smaller extent,
subsidised short-time work schemes, the report says.

Yet, this has led to a marked increase in unit labor costs. “Unless
firms continue to hoard labor, for example because fears of future skill
shortages lead them to hold on to a larger workforce than currently
necessary, some rise in unemployment seems likely,” it said.

The country’s fiscal deficit is seen widening further on lower
income tax revenues due to a continued drop in employment and income tax
cuts at the start of the year.

The OECD forecast Germany’s total public deficit to rise to 5.4% of
GDP this year and to drop back to 4.5% next year when national debt
limitation rules will force the government onto a strict budget
consolidation course.

“In addition, the phasing out of the temporary fiscal stimulus
measures will lower the structural deficit in 2011,” the OECD remarked.

When choosing options for consolidation going forward, priority
should be given to expenditure cuts and reductions in tax expenditures,
rather than tax increases, it advised.

The risks surrounding the projections relate foremost to
developments in world trade, which can change growth in either
direction, the report states.

“In addition, a deterioration of the situation in the banking
sector may adversely impact credit availability and costs and thus
investment growth,” the OECD cautioned.

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

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