Top institutes upbeat on German economy

In their closely read spring report, the institutes said so far this year Germany appeared to be holding up well despite a slowing US economy, the credit crisis, rising energy and food prices, and a strong euro.

"Despite a range of adverse influences, economic conditions remained favourable in Germany at the beginning of 2008," the report said. "All in all, although a noticeable slowdown in economic growth is to be expected as a result of these powerful shocks, a recession ... is unlikely."

The head of the German central bank Axel Weber - a member of the governing

council of the European Central Bank, which sets interest rates in the euro area - echoed the institutes' optimism, saying Germany had "weathered the global headwinds remarkably well."

"The ongoing financial markets turmoil has so far had no discernible impact on the German economy," Weber said in a speech in Frankfurt on Thursday, adding that the central bank sees first-quarter growth in Germany at about 0.75 percent. "The conditions required for a continuation of the economic upturn in Germany are still very much in place even though downside risks persist," Weber said, adding he sees no "compelling reason" to paint a bleak growth scenario for the German economy this year.

The six institutes said that in contrast to other industrialised countries, sentiment indicators in Germany remained positive and data on demand and production on the whole have indicated continuing expansion. Data last week showed that German exports - the motor of the economy - had risen 9.0 percent year-on-year in February despite the euro making them more expensive to customers outside the 15-nation euro zone.

Economy Ministry figures had shown meanwhile that German industrial output rose 0.4 percent in February when analysts had forecast a drop. The last reading for the Ifo business climate index also showed a surprise rise, while the market-moving ZEW indicator improved in March and in February.

An improvement in the labour market is also a reason for cheer, the institutes said, with the jobless rate for March 1.5 percentage points lower than a year-earlier at 7.8 percent.

But the data might not stay so good as the year progresses, the report warned, as weaker conditions outside Germany hit demand for exports, which in turn will dampen enthusiasm among firms to invest. Rising prices also remain a particular concern, with consumer inflation in Germany hitting 3.1 percent in March on the back of rising energy and food costs, it said.

For 2008 as a whole, the institutes expect inflation of 2.6 percent, higher then the European Central Bank's target of just below 2.0 percent. Looking further ahead, the institutes expected growth to slow to 1.4 percent in 2009 and for inflation to ease to 1.8 percent.

The institutes cautioned that there remained "great uncertainty" about the world economy and that Germany may not be able to escape a recession if credit conditions worsen considerably. "The consequences of the crisis in the financial sector are difficult to forecast because the extent of the necessary writedowns are not yet known and because it is uncertain how much further property prices will fall," they said.