Confidence grows in German economic rally

By Andrew McCathie

BERLIN (DPA): Germany's economy is gaining momentum with the country's six leading economic institutes revising upwards their forecasts to predict solid growth of 2.8 percent over the next two years along with a marked fall in unemployment and rising interest rates.

For Chancellor Gerhard Schroeder, the prospects of a healthy economic growth rate and sinking unemployment neatly coincide with Germany's political situation with his government possibly riding an economic upswing and growing jobs market in the run up to the next election in 2002.

This is particularly the case as Schroeder made job creation the centerpiece of his 1998 election campaign.

The institutes forecast that the nation's high unemployment rate will dip below 9 percent next year after dropping from 10.2 percent in 1999 to 9.6 percent this year.

That said, however, the immediate outlook for Europe's powerhouse economy was somewhat clouded with the release of the institutes' report coinciding Tuesday with the publication of Germany's keenly watched business confidence index which showed business confidence suddenly falling last month.

But according to Jean-Francois Mercier, economist with the U.S. investment house, Salomon Smith Barney, the decline in the business climate index was small compared to the strong rise over the past year.

In addition Mercier saw the institutes' report as showing "that confidence in the German recovery is spreading."

Moreover, the institutes' see the prospects for Europe's powerhouse economy as "better than they have been in a long time" with the institutes revising upwards their growth predictions made only six months ago when their last assessment was made.

Instead of an economic growth of 2.7 percent, the institutes are now expecting a growth rate of 2.8 percent both this year and next year with a strong performance by the nation's export machine helping to underpin the pick up in the world's third biggest economy.

This is also in line with a stream of economic data out of Germany in recent months which have pointed to a big rebound in both manufacturing orders and production as the economy finally shakes off the ill-effects of the emerging markets crisis.

Even Germany's hard-pressed retail sector might have cause to be more optimistic as the year progresses with the institutes seeing the government's planned tax reform adding to the income of private households.

But the report's positive outlook along with a series of upbeat statements from the European Central Bank (ECB) about Germany's brightening economic prospects have done little to help Europe's struggling common currency.

The euro slipped near its record low Tuesday to 94.56 U.S. cents from 95.45 cents Monday following the unexpected slide in business confidence.

The institutes' prediction of an economic growth rate of 2.8 percent both this year and in 2001 are also somewhat more cautious than the forecasts by private economists with many seeing the German economy powering ahead to a growth rate of about 3.2 percent this year.

What is more, growth in Germany is still likely to trail the economic performance turned in by its eurozone partners, where growth is forecast by the institutes to 2.9 percent next year after hitting 3.2 percent this year.

Despite having entered the new year with prices in Germany rising in response to escalating energy costs to 1.5 percent this year from 0.6 percent last year, the institutes see inflation edging back to 1.3 percent next year.

A key factor for the institutes in their hopes for inflation is the moderate wage outcome for key German unions.

And with a modest inflationary outlook and wage settlements under 2 percent for the next two years, European rates might not rise as high as the more than 4 percent that some private economists had expected.

Nevertheless, the institutes see rates in the 11-member eurozone increasing to 4 percent with the ECB delivering another 50 basis points rise in the coming months.