IMF slashes growth forecasts for Germany

BERLIN: The International Monetary Fund on Tuesday slashed its forecasts for output in Germany this year and in 2011, warning that a recovery in Europe’s top economy would only be “moderate and fragile.”

Growth in Germany is set to be 1.2 per cent in 2010, the IMF said, sharply revising down a projection of 1.5 per cent made only last month for the world’s second-largest exporter after China.

In 2011, output is poised to grow by 1.7 per cent, said the Fund, again pushing lower its February forecast of 1.9 percent. “There are substantial downside risks reflecting banking weaknesses and the possibility of weaker-than-expected global trade,” the IMF said in a regular report on Germany’s economy.

“Economic recovery is likely to be moderate and fragile,” the report added. The forecast is significantly more pessimistic than the German government, which is counting on growth of 1.4 per cent, or the country’s central bank, which expects 1.6 per cent.

However, the forecast is in line with that of other international institutions, notably the OECD, which last week projected German growth of 1.1 per cent in 2010. Germany is gingerly getting back on its feet after the worst slump in six decades, with output shrinking by five per cent last year.

Chancellor Angela Merkel launched a 81-billion-euro (108-billion-dollar) stimulus programme to counter the crisis, which helped drag the economy out of recession. The IMF praised the measures taken as a “timely and appropriate policy response.”

However, the billions ploughed into stimulus to jump-start the economy would increase Germany’s deficit this year to nearly twice the maximum permitted by the European Union’s rules, the IMF said.

Berlin has vowed to bring its deficit below the ceiling of three per cent of gross domestic product by 2013, without specifying how it aims to achieve this. The report stressed the importance of Berlin’s rectitude for the wider EU.

“Germany’s fiscal actions matter in Europe because of the country’s relative size and because they could set an example for fiscal consolidation for the rest of Europe,” said the Fund. “Conversely, a failure to consolidate the public finances in Germany would damage the national and European fiscal frameworks.”

The IMF also weighed in on the argument over Germany’s dependence on exports that has been a source of tension between Berlin and Paris in recent weeks. French Finance Minister Christine Lagarde lashed out at her neighbour earlier in March, saying that Germany’s strong surplus, a result of exporting more goods than it imports, was unsustainable for Berlin’s eurozone partners.

“(Could) those with surpluses do a little something? It takes two to tango,” Lagarde told the Financial Times, stressing that Germany needed to strengthen domestic demand. This prompted a ferocious response from Merkel, who said in a key speech in parliament that “it is absurd, really, to make Germany a scapegoat with its competitive economy.” For its part, the IMF said that Germany needed to “make the economy more flexible and strengthen domestic sources of growth.”