The German government today revised up its forecast of 2010 economic growth in its twice yearly outlook. The Eurozone's biggest economy will grow 1.4 per cent this year, compared with the 1.2 per cent growth forecast in October. However, Deutsche Bank, Germany's biggest, is forecasting growth of more than 2 per cent.

On Tuesday, in its update of its October 2009 World Economic Outlook, the International Monetary Fund said it was cautiously optimistic for the German economy and it forecast GDP (gross domestic product) to expand by 1.5 per cent in 2010, up from 1.2 per cent in October.Global growth is estimated at 3.9 per cent in 2010, from 3.1 per cent last year and the IMF is forecasting German growth at 1.9 per cent in 2011.

The IMF said the Eurozone could grow by 1 per cent in 2010, with Spain remaining in recession.

The German Economics Ministry said in its latest outlook, that exports will rise 5.1 per cent in 2010 after falling 14.7 per cent last year.

Consumer spending is forecast to dip 0.5 per cent, compared with last year's rise of 0.4 per cent, triggered by stimulus spending.

Unemployment is forecast to rise 320,000 to an average 3.7 million as the recovery remains “fragile” after GDP contracted 5.0 per cent last year.

“Uncertainty about the further course of the economy is high,” Economy Minister Rainer Bruederle remarked to reporters in Berlin.“Against this backdrop, we’ve made a cautiously optimistic forecast. All in all, Germany has pulled through the worst economic crisis since the war quite well.”

Europe’s biggest economy in recent months has provided mixed signals; growth in the fourth quarter stagnated according to a preliminary estimate, while this week, the Ifo Institute reported that business confidence in January, rose to an 18-month high.

Deutsche Bank said in a report published on Tuesday, it expects real GDP to grow more than 2 per cent.

Five reasons why things will be better in 2010

1. The resolute response from policymakers
2. The stabilisation of financial markets
3. The synchronised global economic upturn
4. Low inflation and
5. Improved sentiment, especially in the business sector.

DB says there will continue to be benefits from two stimulus packages totalling 3% of GDP which were implemented in 2009. A third one was passed recently, the so-called “Growth Acceleration Act”, amounting to €8 ½ bn or ¼% of GDP. The stimulus packages I and II comprise among other things tax cuts and tax reliefs both on income and corporation taxes, increases in child benefits, the reduction in contribution rates for unemployment and statutory health insurance, the car scrappage bonus, the extension of short-time working arrangements and higher public spending especially on infrastructure. The latter measures will take effect primarily in 2010.

With the Growth Acceleration Act families will gain additional relief in 2010 via a higher child allowance. There are also concessions on inheritance and corporation taxes as well as a reduction in VAT on hotel stays from 19% to the lower rate of 7%.

Higher demand at home and abroad, the ongoing effects of the stimulus packages and the overall increase in confidence in the financial markets suggest that there will be a palpable increase in industrial production of around 6% in 2010 as a whole. Capital goods industries are likely to perform better than consumer goods in 2010 thanks partly to a strong base effect. However, DB warns that this increase will not suffice to rapidly regain the high degrees of capacity utilisation seen before the outbreak of the crisis.

It will probably take another three years to attain approximately the same level, as capacity utilisation remains more than 5 per cent below the lowest reading of recession year 1993.

Economic outlook 2010: Positive signals for the German economy