BERLIN (MNI) – The Organization for Economic Cooperation and
Development in its latest Economic Outlook released Wednesday forecast
German GDP to increase by 3.4% this year and by 2.3% next year.

Germany’s export-led recovery is continuing, with domestic demand,
notably business investment and private consumption, increasingly
contributing to growth, the organization remarked.

“Employment continues to rise and, coupled with wage increases,
should support private consumption growth over the next couple of
years,” it predicted. Growth is projected to slow somewhat in 2012 as
the output gap closes.

“Recent indicators suggest that growth will continue to be strong
in the near term, though less buoyant than at the start of the year,”
the OECD said.

“Business confidence remains at historically high levels,
suggesting that any adverse growth effects from the earthquake in Japan
— notably through supply chains — will be limited,” it reasoned.

As spare capacity is being reduced as the output gap closes, firms
are increasingly undertaking expansive investments, the OECD observed.

“While the currently high inflation rates, boosted by high energy
and food prices, may hamper private consumption, higher but still
moderate wage settlements and continued employment gains are likely to
foster spending by households,” the organization argued.

With unemployment continuing to fall, the labor market is getting
tighter and labor shortages are beginning to emerge in some sectors, the
organization observed. “This will lead to wage pressure and compensation
per employee is projected to rise by around 3% in 2012, the highest rate
since the mid-1990s,” it said.

As a consequence, core inflation is likely to increase even while
headline inflation falls back as the impact of energy and food price
increases fades, the OECD reasoned. It forecast HICP inflation of 2.6%
this year and 1.7% next year. Core HICP inflation is projected at 1.1%
in 2011 and 1.5% in 2012.

The fiscal position of Germany is seen improving further. The OECD
forecast the public deficit to fall from 3.3% of GDP last year to 2.1%
this year and 1.2% next year. The government’s budget consolidation path
“is appropriate and well-timed, given the cyclical position of the
economy,” it said.

The OECD pointed to upside as well as downside risks to its
forecasts. “On the negative side, export growth could be weaker,
possibly related to a further rise in commodity and energy prices
hampering world trade,” it noted.

Moreover, higher inflation could further erode real disposable
income of households and, thus, consumption growth, it cautioned. A
deterioration of financial conditions or the situation in the banking
sector, potentially related to a government debt restructuring in the
Eurozone periphery, could hurt investment, it remarked.

“On the positive side, private consumption could grow more rapidly
if household income grew more rapidly than projected or if consumers
became more confident and lower their saving rate,” the OECD said.

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

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