UPDATE 1-German economy to grow by 2.6 pct in 2018 - Ifo

* Institute lifts growth forecast for Europe’s biggest economy

* Germany’s strong upswing to extend far into next year

* Bullish projection comes despite political impasse

* Upswing is pushing up employment, budget surplus (Adds more Ifo details, PMI survey, background)

By Michael Nienaber

BERLIN, Dec 14 (Reuters) - The German economy will expand by 2.6 percent next year, the Ifo institute said on Thursday in its updated forecast for Europe’s economic powerhouse, pointing to a broad upswing that is generating record-high employment and buoyant tax revenues.

The surprisingly bullish projection - a hike from Ifo’s previous estimate of 2.0 percent for 2018 - comes despite a political stalemate, with Chancellor Angela Merkel struggling to form a coalition government nearly three months after a federal election.

If confirmed, the growth rate would be the highest since the 3.7 percent registered in 2011, when massive state spending followed the financial crisis and the global economic downturn.

“The German economy is humming,” Ifo head Clemens Fuest said, adding that the strong economic upturn would extend well into 2018.

“Many sectors are flourishing, from construction to manufacturing and trade, which is why the Ifo business climate index is climbing from one record-high to the next,” Ifo economist Timo Wollmershaeuser said.

The Ifo institute will publish its closely watched indicator on German business morale for December next Tuesday.

In another positive sign for the economy, a survey among purchasing managers (PMI) showed on Thursday that growth in manufacturing hit its highest level in more than two decades.

“Companies appear to be just shrugging off any political worries and just focusing on the demand environment - demand both at home and abroad is rising very, very strongly,” said IHS Markit economist Chris Williamson.

The Ifo institute confirmed its recently raised forecast for 2.3 percent growth this year, unadjusted for calendar effects.

“If the number of working days were not so low, we would even have a growth rate of 2.5 percent this year,” Ifo’s Wollmershaeuser said. For 2019, Ifo predicts 2.1 percent growth.

Germany’s strong domestic demand is helped by record-high employment, rising real wages and low borrowing costs while its exporters are benefiting from a global economic recovery.


Ifo expects the German labour market to expand further, with employment levels seen reaching new record highs at 44.8 million in 2018 and 45.2 million in 2019 after 44.3 million this year.

The institute predicts the number of unemployed will fall to 2.4 million in 2018 and 2.2 million in 2019, despite the influx of more than one million refugees since 2015.

Ifo said inflation would rise as the upswing gradually pushes up prices. It expects the national inflation rate to climb to 1.9 percent in 2018 and 2.2 percent in 2019 after 1.8 percent this year.

Due to the strong economy, German authorities can count on record budget surpluses in the coming years.

The surplus of all state levels - including federal government, regional states, municipalities and social funds - is projected to swell to 50.6 billion euros in 2018 and to 62.1 billion euros in 2019 after 42.1 billion euros this year. This would be more than 150 billion euros combined.

“Due to pending government formation, these estimates are subject to uncertainty, and any changes in spending or revenue would increase or decrease the surplus accordingly,” Ifo said.

Both Merkel’s conservatives and the centre-left Social Democrats, who are discussing forming another “grand coalition” after governing together the past four years, have promised to cut taxes for mid-income families and increase state spending on education and digitisation. (Reporting by Michael Nienaber; Editing by Hugh Lawson)