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IMF slashes growth forecast for Germany

AFP · 30 Mar 2010, 15:43

Published: 30 Mar 2010 15:43 GMT+02:00

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Germany is set to grow 1.2 percent in 2010, the IMF said, sharply revising downward a projection of 1.5 percent made only last month for the world's second-largest exporter after China.

In 2011, output is poised to expand by 1.7 percent, 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 percent, or the country's central bank, which expects 1.6 percent.

However, the forecast is in line with that of other international institutions, notably the OECD, which last week projected German growth of 1.1 percent in 2010.

Germany is gingerly getting back on its feet after the worst slump in six decades, with output shrinking by five percent last year.

Chancellor Angela Merkel launched a €81-billion ($108-billion) 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 percent of gross domestic product by 2013, without specifying how it aims to achieve this.

The report stressed the importance of Berlin's fiscal 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.

Story continues below…

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 testy 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."

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Your comments about this article

20:34 March 30, 2010 by peschvogel
There goes up the level of violence against foreigners again. Germany's exports are not as strong as they appear to be. Actually 75% of German exports are going to EU. Thats going to hurt because 1/2 of these countries are going to be in a recession for a very long time. Hope Germany can make friends with other trading nations...
11:36 March 31, 2010 by MJTinNOLA
What is amazing to me is that no one is willing to state the obvious. The Euro is overvalued by between 10-15%, and it needs to be adjusted. If the Euro goes back up to 1€=$1,60 again, like it did this past year, it will be a disaster for the Euro-zone and Germany in particular. A small devaluation is badly needed. This will not only be a boon to the German economy, but a huge help to other Euro-zone economies such as: Greece, Italy; Spain; Portugal; and Ireland. Why? Economics 101. The Euro is seen as an expensive currency, so goods produced in the Euro-zone are already seen as more costly. Devaluation of the Euro will also help the aforementioned countries by helping their debt load, and giving them time to make budget and other economic changes that will strengthen the Euro in the long run. It would be a boon to the German economy as well. The German economy is heavily dependent on high-value, exports. A cheaper Euro would reduce the costs for these products for overseas buyers and allow German goods to be more competitive with US, Japanese, and Chinese products. Devaluation of the Euro is a win-win for all parts of the Euro-zone. I just do not understand why they refuse to see this, and do what needs to be done.
12:29 March 31, 2010 by michael4096
The euro was designed with approximate parity with the dollar in mind. People keep talking about the euro's weakness when it is actually the dollar regaining some of the strength it lost.

And, as you say, it might not be a bad thing for the euro to lose value even if it does increase the price of . Not only will it increase the export possibilities but it also increases local production of goods currently uncompetitive to make locally.

But, the strength of the euro is determined by its desirability on the world market and not mandated by frankfurt.
21:26 April 1, 2010 by dbert4
I guess that the IMF didn't hear about the drop in the German unemployment rate, oops!

Currency exchange rates are are set less by governments and more by pinheads in London.

The German's aren't against a cheaper EURO, they don't have control of the rate.
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