UPDATE 1-Key institutes raise German 2012 growth outlook

Thu Apr 19, 2012 6:34am EDT

* German GDP growth seen at 0.9 pct this year

* Euro crisis still main risk for German growth

* Domestic demand and employment seen improving

By Alice Baghdjian

BERLIN, April 19 (Reuters) - Germany's leading economic institutes revised their 2012 growth forecasts upwards slightly on Thursday, but warned that the debt crisis still haunting the euro zone remained the biggest threat to growth in Europe's largest economy.

The eight institutes, whose forecasts form the basis for the German government's own growth estimates, raised their growth forecast to 0.9 percent this year, rising to 2.0 in 2013.

In October, they had forecast 0.8 percent growth in 2012.

"After a lull that lasted several months, the German economy picked up again in spring 2012," the institutes said in their twice-yearly report.

The institutes said the global economic environment had brightened slightly since last winter, when the German economy contracted by 0.2 percent in the final quarter of 2011 on sagging exports and weak private consumption.

Many economists now think this was a blip, and that Germany's export driven economy, which bounced back quickly from the 2008/09 financial crisis, will avoid a recession, generally defined as two consecutive quarters of contraction.

The institutes forecast a further decrease in unemployment, following a two-decade low last month, to 6.2 percent in 2013 from 6.6 percent in 2012, already down from 7.1 percent in 2011.

Consumer confidence remained close to a one-year high heading into April, as Germany's solid labour market has propped up spending, and surveys point to private consumption as a bright spot in the economy that can weather any bad news.

German analyst and investor sentiment rose unexpectedly in April, boosting hopes that Europe's powerhouse is recovering from a weak spell. The new report said German firms were more price-competitive now than at any other time in the last 30 years, primarily due to the weakness of the euro.

RISK REMAIN

But risks remain to growth from the euro zone's relentless debt troubles, as the impact of the European Central Bank's massive liquidity injections wanes and markets refocus on their weak banks and difficulties pushing through reforms to spur economic growth.

"The biggest downside risk to economic development in Germany remains the debt and confidence crisis in Europe, which essentially remains unresolved," the institutes said.

"The latest increases in risk premiums for Spanish and Italian government bonds show that the debt and confidence crisis continues to smoulder."

The institutes' German inflation forecast for 2012 was revised upwards to 2.3 percent from an initial estimate of 1.8 percent in October, as oil prices spiked recently due to tensions between the West and Iran, adding pressure on the ECB to avoid an interest rate cut.

Balancing policy for Germany's strong economy and the euro zone's weaker peripheral members was a problem for the ECB for much of last year, when price growth in Germany helped keep the overall euro zone figure consistently above target.

In March, German inflation stood at 2.1 percent, above the ECB target for price stability of close to but just under 2.0 percent.

Economists said they expected to see confidence in Germany on the wane, with the closely watched Ifo index, due to be published on Friday, forecast to show a fall in business sentiment, after rising for five months in a row.

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