Germany 'risks entering recession' say think tanks

Storm brewing over the Siegessaeule in Berlin The institutes warn that a storm may be brewing over Germany's economy

A group of leading think tanks in Germany have cut growth forecasts for the country and warned of recession.

The economic institutes said Europe's biggest economy would only grow 1% next year instead of the 2% they had been expecting six months ago.

But this assumes that the crisis in the eurozone does not worsen.

They also criticised the European Central Bank's latest initiative to ward off the crisis, saying its debt purchases risked fuelling inflation.

Last month the ECB unveiled plans to buy up the government debts of struggling eurozone members, but only if those governments first signed up to a rescue package, including strict conditions on cutting their overspending and reforming their economies.

"This process could be triggered by the ECB effectively providing monetary financing for states," according to the semi-annual report by the four think tanks, Ifo in Munich, IFW in Kiel, IWH in Halle and RWI in Essen.

"Europe's citizens and players in the markets may lose trust in the ECB's ability to ensure long-term price stability as a result.

"In the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation even if states deviate from the adjustment programmes, which could drive up prices and lead to an increase in inflation expectations."

Recession

The four also cut their forecast for German growth this year to 0.8% from 0.9% previously.

The eurozone's woes, coupled with a general slowdown in global growth, was hurting business confidence and investment in Germany, they said.

This was despite the fact that German exports had continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Protesting Greek shipyard worker Meanwhile in Greece unemployment has now risen to more than a quarter of the entire workforce

"This assessment of the German economy is based on the assumption that the situation in the eurozone gradually stabilises over the forecasting period and that confidence, especially on the part of investors, is restored," the report warned.

"Should the situation in the eurozone continue to deteriorate, this will also impact the German economy. Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession."

They said their baseline scenario was that unemployment in Germany would rise from its current 20-year low of 6.2% to 6.8% next year.

The German government was forecast to almost balance its budget this year and next.

Joblessness

Germany is Europe's biggest single national economy, and until now has been faring far better than almost every other eurozone member.

A German recession could sap business confidence across the eurozone even further, and would hit the other eurozone members more directly if their exports to Germany fell.

Meanwhile, data from the rest of the eurozone continues to paint a grim picture.

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Everyone agrees that the biggest short-term uncertainties hanging over the global economy are US fiscal policy and the crisis in the eurozone”

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Consumer prices inflation in Spain rose to a 16-month high in September of 3.4%. High inflation is particularly unwelcome in a country that is already struggling with shrinking incomes and uncompetitively high wage costs within the eurozone.

It will also make it even harder for the government to cut its overspending from 8.9% of Spanish economic output this year to 4.5% in 2013, as Spanish state pensions are indexed to the inflation rate.

The data comes a day after Standard & Poor's joined fellow rating agency Moody's in cutting the Spanish government's credit rating to just one level above a "junk" rating - at which point many investors would have to reduce their holdings of Spanish government bonds.

The downgrade is likely to be followed by similar ratings cuts for Spanish banks and companies in the coming days.

Meanwhile in Greece, the unemployment rate rose above 25% for the first time in July, according to the Greek statistics office.

The record 25.1% was up from 18% a year ago. The unemployment rate in Spain is also 25%.

The poor state of the eurozone, along with the risk of massive automatic government spending cuts in the US early next year, prompted the IMF head Christine Lagarde to issue yet another warning about the state of the global economy earlier on Thursday.

"Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is hampering decision makers from investing, from creating jobs," she said during a press conference in Tokyo.

"We need action to lift the veil of uncertainty."

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