Europe

Tuesday, May 22, 2012 - 04:00

OECD Sees Germany's GDP Growth At 1.2% In 2012, 2.0% In 2013


BERLIN (MNI) - The Organization for Economic Cooperation and Development on Tuesday forecast German GDP growth to slow to 1.2% this year before picking up to 2.0% next year.

"Following a strong start at the beginning of the year, activity is set to pick up further as confidence improves and domestic demand strengthens," the OECD said in its latest economic outlook.

"Strong labor market performance, low deleveraging needs and favorable financing conditions will contribute to the rebound in private consumption and investment over the projection period," it predicted.

Domestic demand is set to increasingly contribute to the recovery as household income rises and the saving ratio declines below pre-crisis levels, the OECD reasoned.

Growth is projected to rise above potential in 2013, mainly driven by domestic demand, it forecast. Consumer spending will benefit from strong labor market performance and real wage increases. "Financing conditions will continue to support investment, with little tightening in credit standards and limited increases in borrowing costs," the OECD said.

"The absence of deleveraging needs for households and the corporate sector clears the way for a recovery of consumption financed from savings and loan-financed investment," it said.

Increases in labor costs, as slack is taken up, will lead to an increase in core inflation to around 2% in 2013, the OECD predicted.

Due to the healthy economy and the government's budget consolidation course, the country's total public budget deficit is seen by the OECD at only 0.9% of GDP this year and 0.6% next year.

"Germany is now already in a position to allow automatic stabilisers to work fully, although the resilience of the labor market

-- unemployment did not rise in the recent soft patch -- means they may

be relatively small," the report observed.

The risks surrounding the projections remain substantial but have become broadly balanced, the report pointed out.

The main downside risk relates to international developments, it noted. "In particular, further stress in euro area sovereign debt markets could weaken domestic bank balance sheets and lead to tighter financing conditions," it noted. Moreover, rising oil prices could hurt domestic demand, the OECD said.

By contrast, better domestic demand prospects could make Germany more attractive for investment and innovation in the services sectors, especially if structural reforms in this area were to be implemented, it said.

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

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