* Institutes cut 2012 German GDP growth f'cast to 0.8 pct
* See ECB cutting rates to 1.0 pct as recession threatens
* See German inflation dropping to 1.8 pct in 2012
(Adds details, background)
By Sarah Marsh
BERLIN, Oct 13 The greatest risk to Germany's
economy is a worsening of the European debt crisis which could
lead to tighter credit conditions, leading economic institutes
said on Thursday in their keenly-eyed twice-yearly report.
The eight institutes, which are seen as influential policy
advisers to the German government, cut their growth forecast for
Europe's bulwark economy to 0.8 percent next year. In April,
they had forecast 2.0 percent.
"The debt crisis in Europe is threatening to become a
banking crisis which is increasingly weighing on the German
economy too," the institutes said.
"The strongly increased uncertainty will dampen domestic
demand and foreign trade will probably no longer contribute to
the expansion due to the difficult situation of important trade
Germany's export-driven economy has recovered swiftly from
the financial crisis, outperforming its peers and providing a
crucial growth engine and anchor of stability for Europe.
Recent indicators however show German growth easing due to
the global slowdown and the euro zone's debt crisis. Industry
output, orders and retail sales slumped in August.
Forward-looking indicators are also gloomy, with business
sentiment dipping to its lowest level since mid-2010 in
September, and analyst sentiment dropping to its lowest level in
nearly three years.
However, an unexpectedly strong start to the year will
likely compensate for a weaker second half, and the institutes
slightly raised their 2011 growth forecast to 2.9 percent from
They were also more upbeat on inflation, which presented a
challenge to the European Central Bank this year as it sought to
balance monetary policy for struggling debtor economies and for
The institutes saw German inflation dropping to 1.8 percent
next year from 2.3 percent in 2011. Data last month showed
inflation jumping unexpectedly to a three-year high of 2.6
percent in September.
Due to lower inflation expectations and the growing risk of
a European recession, the European Central Bank will likely cut
interest rates to 1.0 percent, the institutes said.
The institutes see unemployment continuing to fall despite
the generally worsening outlook. The jobless rate will likely
fall to 6.7 percent in 2012, from 7.0 percent in 2011.
Germany's government plans to publish its own economic
forecasts on Oct. 20, which will serve as the basis for its
November tax estimates and the budget planning.
For a factbox on recent revisions to forecasts for German
economic growth, please click on
(Reporting by Madeline Chambers and Sarah Marsh; Editing by