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Bundesbank raises 2008 growth forecast, but cuts it for 2009

AFP · 6 Jun 2008, 13:39

Published: 06 Jun 2008 13:39 GMT+02:00

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"The German economy got off to a very strong start to 2008. Growth is likely to be more subdued in the second and third quarters, however," the Bundesbank said in its June monthly report.

But growth "will pick up at the end of this year or early 2009 against the backdrop of a then more favourable global economic setting and a slowing rate of inflation," it said.

The German economy posted "strong, broad-based" growth in the first quarter, expanding at a quarterly rate of 1.5 percent or by a real 2.6 percent when adjusted for the number of working days, clearly exceeding the Bundesbank's forecasts.

Despite some special factors skewing the figures, "there is some evidence that the German economy's intrinsic momentum or resilience has, to date, been underestimated," it said.

But the Frankfurt-based bank agreed with economists that this strong performance at the start of the year would not continue, saying it expected "more moderate" growth in the coming months.

It now expects calendar-adjusted growth for the year as a whole of 2.0 percent. Due to the strong first quarter growth this represents a 0.4 percentage point increase from its last forecast in December.

Evidence this week added to signs that the first quarter growth rate was something of a one-off, with data on Friday showing that industrial production fell 0.8 percent in April.

"The fall comes after an equally sharp 0.8 percent drop in March ... and suggests that industrial output is very unlikely to match Q1's *(first quarter) strong 2.3 percent rise in Q2," said Jennifer McKeown at Capital Economics.

And figures on Thursday from the economy ministry showed industrial orders fell for the fifth straight month in April, and at a faster pace than in March.

The chemical and automotive sectors showed the biggest fall in orders, but machine tools, a mainstay of the German economy, continued to post healthy results.

Strong price rises for food and energy are also making German consumers increasingly worried about how far their incomes would stretch, according to the recent survey by market research group GfK.

Official projections put inflation at 3.0 percent in May, with prices for heating oil rising as much as 13.3 percent just between April and May, and soaring by as much as 64.6 percent compared to May 2007.

Story continues below…

But although the Buba said it was unlikely that inflation would fall below 3.0 percent in 2008, it said it could fall towards 2.0 percent in 2009, closer to the European Central Bank's target rate of close to but below this level.

This, coupled with more favourable conditions outside Germany supporting demand for German exports, would help the economy pick up towards the end of 2008 or in early 2009, the Bundesbank said.

The Bundesbank cut its 2009 growth forecast by 0.6 percentage points to 1.4 percent.

The German government expects 1.7 percent growth in 2008 and 1.2 percent in 2009.

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