Ifo raises German economic forecasts a notch, domestic factors help

BERLIN, June 26 Thu Jun 26, 2014 6:12am EDT

BERLIN, June 26 (Reuters) - Germany's economy will grow by 2.0 percent this year, Ifo institute said on Thursday, slightly raising its previous forecast on expectations that companies will invest more again and drive domestic demand.

But Ifo made its projections dependent on tensions in Ukraine not escalating and on fighting in Iraq not leading to an oil price explosion.

The influential think-tank said growth in Europe's largest economy would accelerate to 2.2 percent next year, up from 0.7 percent expansion last year.

In December, Ifo had forecast growth of 1.9 percent this year. The government expects Europe's largest economy to expand by 1.8 percent.

"The pick-up is robust and is strengthening," said Ifo economist Timo Wollmershaeuser. "The precondition is that the conflict over Ukraine does not worsen and that there will not be an oil price explosion because of fighting in Iraq."

Ifo expected equipment investment, which was negative in the past two years, to pick up by 7.4 percent this year and 10.0 percent next year.

But earlier this week, the institute's closely-watched business sentiment survey weakened more than expected for June as companies grew increasingly concerned that tensions in Ukraine and Iraq would hurt their business.

Ifo said one of the main risks to the global economy was still the "fragile situation" in the euro zone, where crises could break out again at any point as countries were still "far too expensive to be competitive".

Ifo said it did not see dangers of inflation, with consumer prices rising by 1.1 percent this year and 1.7 percent next year - in part due to a new national minimum wage. The European Central Bank defines stable prices as just under 2 percent. (Reporting by Annika Breidthardt)

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