German Economic Institutes Slash 2003 Growth Forecast

In their spring report, the economic institutes said they only expected the German economy to grow 0.5 percent this year. Only six months ago they had expected 2003 growth at 1.4 percent.

“The German economy is stuck in a period of continuing weakness,” said the report, which was officially presented by the institutes’ chief economists in Berlin on Tuesday. For 2004, they cut their growth forecast from 2.25 percent to only 1.8 percent.

The institutes said Europe’s largest economy was likely to be blighted with sluggish growth and increasing unemployment for the foreseeable future, unless the German government continued with painful reforms to cut back the welfare state and liberalize the labor market.

Schröder’s reform package

German Chancellor Gerhard Schröder last month announced a package of sweeping proposals to revive flagging German growth and shore up the country’s creaky social security system.

But his “Agenda 2010” plan has encountered massive criticism from trade unions and the left-wing faction of his own Social Democratic party. At the heart of the reforms are proposals to cap unemployment benefits at 12 months and make it easier for small firms to hire and fire new workers.

Though the six think-tanks endorsed the direction of the government’s reform proposals, the spring report also made clear that the institutes didn’t believe they went far enough to re-ignite the economy: “If this agenda contains everything that is supposed to be implemented by 2010, then conditions for growth will not improve considerably.”

In recent years, the German economy has stalled under the weight of its generous welfare system and constricting labor market policies. Economic growth slowed to only 0.2 percent in 2002, its lowest annual rate since a recession in 1993, and German unemployment is running at a five-year high of 11 percent.

Increased pressure on the government

The slashed 2003 growth forecast will likely increase pressure on the government to lower its own official forecast of one percent growth for this year. That in turn could spell trouble for Berlin and its budget deficit, which the institutes expect to reach 3.4 percent of gross domestic product in 2003. That would mean Germany would break the European Union’s three-percent limit for a second consecutive year.

The institutes expect unemployment to average 4.45 million this year, compared with the government's official forecast of 4.14 million. Unemployment is seen rising even further in 2004 to average 4.5 million, which would be an all-time record.

But German Economy and Labor Minister Wolfgang Clement dismissed the bleak outlook for the country’s joblessness, saying the government was on the right course.

“The institutes underestimate how dynamic our labor market reforms are,” he said.