Die Welt

Michael Glos, the German Minister for the Economy, announced in Berlin that the government had reduced its forecast for economic growth next year from 2.4 to 2 per cent. The growth forecast for the current year is up from 2.3 to 2.4 per cent.

Glos announced that unemployment would fall below an annual average of 3.5 million to its lowest level in ten years.

In 2008 global economic activity would be would be down slightly , and growth would be determined mainly by internal factors. Commercial investment was expected to be buoyant, supported by consumer demand.

The leading German economic research institutes had been restrained in their Autumn reports, stating that the economic upswing had paused. However, they expect growth this year to be strong at 2.6 per cent, and 2.2 per cent in 2008. Unemployment is expected to fall and disposable income to rise. The researchers recommended that the government should hold its present course in its programme of economic reforms.

The research institutes estimated that German economic activity is being hampered this year by several factors. VAT increases have reduced domestic demand, especially private sector consumer spending, as have increases in oil prices and the strengthening of the Euro. The latest turbulence in the financial markets after the US sub-prime mortgage market crisis in the US are expected to have their effect as well.

Since the global economy is growing more slowly than in previous years, the contribution of foreign trade to growth - the classical drivers of the German economy - will be smaller, at the same time as the string Euro puts the brakes on as well.

According to the institutes’ forecasts domestic growth will replace exports as the essential mainstay of economic activity, with consumer expenditure contributing two thirds. Researchers advised political leaders to stay the course and to increase expenditures on investment. They suggested increasing public expenditure by only 2 per cent annually and reducing subsidies by 65 billion Euros. Assuming a nominal growth rate of 3 per cent this would leave a surplus of about 10 billion Euros per year for debt repayment, investment or tax cuts.

The research institutes cautioned against reversing labour market reforms. The Hartz Laws had contributed to a reduction in unemployment. Plans within the coalition to pay contributory unemployment benefits to older workers would, in the long run, take the economy in the wrong direction. They were also skeptical about introducing a minimum wage. However, they conceded that a reduction in unemployment insurance rates would be bearable.