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German Economic Institutes Raise 2012 GDP Forecast

4/19/2012 6:26 AM ET

The German economy is expected to grow at a slightly faster pace than estimated in 2012, as the risks surrounding the global economy receded, according to a joint report published by the country's leading economic research institutes on Thursday.

The gross domestic product is forecast to rise 0.9 percent this year, slightly faster than the previously projected 0.8 percent growth. For 2013, the institutes forecast 2 percent growth.

The acute risks for the global economy has decreased significantly in spring 2012 compared to last autumn, the report said. However, the outlook continued to remain subdued due to the lingering Eurozone debt crisis.

Oil prices as well as slowing growth in emerging economies, particularly in China, also posed risks to the world economic prospects, they said.

For Germany, the institutes expect the main growth impulses to come from domestic demand, especially from investment and consumer spending. On the other hand, exports are only expected to pick up haltingly in view of weak economic activity in the rest of the Eurozone.

The institutes expect the labor market situation to continue to improve with the number of unemployed projected to fall to 2.8 million in 2012.

Real wages may increase by over 3 percent this year and the next. Consumer prices will rise above the 2 percent mark during the period, according to the report.

The Federal Government's budget deficit is expected to drop to 0.6 percent of gross domestic product in 2012 and decrease further to 0.2 percent in 2013. Structurally, the deficit-to-GDP ratio is seen falling to 0.6 percent and then to 0.4 percent next year.

The institutes noted that the biggest downside risk to economic development in Germany remains the debt and confidence crisis in the Eurozone. Although the European Central Bank reduced stress in the banking system through liquidity policy measures, this has "only succeeded in winning time," they said.

The report also warned that the situation in Italy, Ireland and Spain can only be stabilized if planned reforms are actually implemented, and in the absence of any renewed loss of confidence on the part of the financial markets.

The economic forecast is published jointly by Ifo Institute for Economic Research , Kiel Institute for the World Economy, Halle Institute for Economic Research (IWH) and RWI Essen.

by RTT Staff Writer

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