Eurozone outlook brighter on better German forecasts

April 10, 2014
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The Eurozone logo/AFP
The Eurozone logo/AFP

, BERLIN, April 10 – The outlook for the crisis-battered eurozone brightened Thursday as Germany’s leading economic think tanks raised their growth forecast for Europe’s top economy this year and next year.

Greece, one of the hardest-hit euro members, also returned to the debt markets for the first time in four years, raising 3.0 billion euros ($4.1 billion) in a landmark five-year bond sale.

Throughout the long crisis, the German economy has managed to escape with only a few bruises.

And now with a tentative recovery in the single currency area as a whole gradually firming and gaining momentum, buoyant domestic demand in Germany should enable Europe’s biggest economy to expand by 1.9 percent in 2014 and then 2.0 percent in 2015, the country’s top four institutes predicted in their spring report.

That would mark a big increase from 0.4 percent in 2013.

“In spring 2014, the German economy is on an upturn. Domestic demand is the main growth engine,” the institutes — Ifo in Munich, DIW in Berlin, IW in Halle and RWI in Essen — said.

The 2014 growth forecast is fractionally more optimistic than the institutes’ previous prognosis of 1.8 percent from last autumn.

The government is pencilling in growth of 1.8 percent for this year, while both the German central bank or Bundesbank and the International Monetary Fund are expecting growth of 1.7 percent.

German Economy Minister Sigmar Gabriel is scheduled to publish his latest updated forecasts next week.

– ‘Momentum will remain high’ –

“For more than a year now, output has been on the up, employment growth is accelerating and sentiment among consumers and businesses is improving sharply,” the institutes wrote.

“Momentum will remain high in 2015,” they said.

Nevertheless, the think tanks were critical of new economic policies drawn up by the new left-right coalition government under Chancellor Angela Merkel.

“Economic policy will provide headwind for growth,” they complained, describing the decision to lower the retirement age to 63 in certain cases as a “step in the wrong direction.”

The introduction of a fixed national minimum wage from 2015 would also “put the brakes on employment growth,” the institutes warned.

Merkel and her conservative CDU-CSU parties reluctantly agreed to a minimum wage of 8.50 euros per hour in order to coax the Social Democrat SPD party into a power-sharing coalition.

The mechanism is scheduled to come into effect from next year and the think-tanks calculated it could boost wage bills by much as 6.0 billion euros. And that will weigh on company profits and push up product prices, the think-tanks argued.

In all, the minimum wage could cost as many as 200,000 jobs and knock 0.1 percentage point off growth next year, IW expert Oliver Holtemoeller told a news conference.

One of the institutes, Berlin-based DIW, did not appear to agree fully with the findings of its fellow think-tanks, however.

The effects of the minimum wage “are very difficult to evaluate,” said DIW’s Ferdinand Fichtner.

“The long-term effects will not necessarily be negative,” he suggested.

The institutes also estimated that the crisis in Ukraine could also have a negative impact on German growth.

Russia is being threatened with economic sanctions in Europe following its annexation of Crimea.

And a drop of around 4.0 percent in Russian gross domestic product (GDP) would shave between 0.1-0.3 percentage point off German growth, the institutes said.

Elsewhere, signs that the eurozone is emerging from crisis were boosted Thursday by the news that bailed-out Greece successfully returned to bond markets after a four-year exclusion.

Greece sold 3.0 billion euros’ worth of bonds at 4.75 percent with “strong” demand, the finance ministry said in a statement.

The bonds have a life of five years, and this return to the medium-term debt market is a milestone for recession-scarred Greece which is still suffering deeply from the effects of the crisis and resulting reforms.

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