BERLIN (MNI) – The Organization for Economic Cooperation and
Development on Tuesday forecast German GDP growth to slow to 0.4% this
year before picking up to 1.9% next year.

On a workday-adjusted basis, it expects GDP growth of 0.6% in 2012
and 1.9% in 2013.

“First, this reflects a moderation of growth rates from their
cyclical highs towards their lower potential rates, indicating that the
prior upswing was mainly a cyclical one,” the OECD argued in its
economic survey.

“Second, this slowing is reinforced by a generalised slowing of the
world economy, unusually high uncertainty and business confidence that
is declining from high levels,” it said.

Germany’s labor market still remains in relatively good shape, the
OECD remarked. This is due to a decline in structural unemployment as
well as a significant increase of flexibility in working hours,
demonstrating the beneficial effects of past labor market reforms, it
reasoned.

Public debt has increased notably in the crisis, but the budget
deficit is the lowest among G7 countries, partly due to the strong labor
market, the report pointed out. It projected a German public deficit of
1.0% of GDP this year and 0.5% next year.

The weakening of growth in Germany is projected to come mainly from
slowing investment and consumption spending, which may temporarily
suffer from adverse confidence effects, as well as from weaker trade
growth, the report stated.

“Over the medium term, domestic demand is set to strengthen,” the
OECD said. This reflects the solid balance sheets of both households and
non-financial companies, which mean that there is no need for
deleveraging, in contrast to many other OECD countries where housing
bubbles and construction booms led to over-indebtedness, it said.

In addition, domestic demand benefits from monetary stimulus,
notably if the divergence of growth rates across Eurozone countries
continues and monetary conditions remain supportive for Germany, the
report noted.

Beyond the weakening in the short-term, consumers are expected to
react positively to the improvement on the labor market as unemployment
is projected to remain at post-unification lows, the OECD said.

Since not all of the labor market improvement is structural in
nature, and thus the labor market is getting tighter, wage pressure is
likely to set in by 2012, it predicted.

“Disposable income may thus grow more than in past years,
supporting consumption even though equity price declines and uncertainty
may prevent falls in the household saving rate,” the OECD reasoned.

The OECD forecast HICP harmonized inflation for Germany of 1.6%
this year and 1.5% next year.

The institution cautioned, however, that its latest forecasts are
“surrounded by an unusually high level of uncertainty and, notably,
considerable downside risks.”

These risks relate mostly to a further significant worsening of the
Eurozone debt crisis which would have considerable adverse effects on
the domestic banking system, possibly leading to severe constraints on
credit supply, the OECD explained.

“Also, such a scenario would affect growth in Germany’s trading
partners, thus inducing a lower export contribution,” it commented.

At the same time, growth could also develop more favorably if
contagion of the crisis to other countries can be contained, leading to
an improvement in confidence, the OECD said.

“In this case, a more dynamic investment and consumption
development could be envisaged, because German households and firms do
not face general deleveraging needs,” it said.

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

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