German growth slowing, domestic demand firm -OECD

BERLIN Tue Nov 27, 2012 5:00am EST

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BERLIN Nov 27 (Reuters) - Germany's economy will grow by 0.9 percent this year and by 0.6 percent in 2013, with solid domestic demand offsetting the impact of the euro zone crisis, the OECD said on Tuesday.

In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development said a robust labour market, strong wage growth and easy credit would help Europe's largest economy to buck recessionary trends elsewhere in the region.

In its previous report in May, the OECD had forecast German growth in 2012 of 1.2 percent and in 2013 of 2.0 percent. The German government has also cut its 2013 growth forecast to 1 percent from 1.6 percent, mainly due to the euro zone crisis.

"Demand for investment goods, in which German manufacturing is specialised, has been especially weak, reflecting the scaling back of investment plans both domestically and abroad," the OECD said in its report.

"Economic growth is projected to pick up gradually in the course of 2013 as export markets recover. Improving export prospects and confidence as well as favourable financing conditions will boost investment."

"Consumer spending will benefit from real wage increases and solid household balance sheets," the OECD added.

Growth will accelerate to 1.9 percent in 2014, it said.

Recent data has suggested Germany, Europe's growth locomotive, is running out of steam, with the private sector shrinking, industrial output and orders sinking and unemployment rising, albeit from a low level.

Exports, traditional engine of German growth, slid in September at the fastest pace since late last year, though sales outside the euro zone have held up relatively well.

The German government's economic advisers, known as the 'wise men', expect output to grow 0.8 percent this year and next after it expanded by 4.2 percent in 2010 and 3 percent in 2011.

Economists expect the German economy to contract or at least to stagnate in the fourth quarter after eking out growth of 0.2 percent in the previous three months but say it should recover steadily in 2013, a view shared by the OECD.

The OECD said skills shortages pointed to a tight labour market that would keep upward pressure on wages, while unusually low interest rates would also stimulate business activity.

Inflation remains subdued, it said, putting Germany's harmonised consumer price index at 2.1 percent this year and easing to 1.9 percent in 2013.

The European Central Bank targets inflation at just below 2 percent for the euro zone as a whole. German officials have said Berlin could tolerate slightly above-target domestic inflation to compensate for deflation elsewhere in the euro zone.

The euro zone crisis remains the main threat to Germany's prospects, the OECD said, adding that German firms were well-placed to benefit if the situation improves.

"As confidence returns the rebound in German manufacturing and exports could be larger than projected," it said.

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