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News : EU Economy Last Updated: Feb 22, 2011 - 7:27 AM

German growth remains robust in 2011; ECB's benchmark interest rate expected to rise to 1.75% later this year
By Finfacts Team
Feb 21, 2011 - 5:11 AM

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German growth remains robust in 2011 and the Eurozone's biggest economy accounting for about 30% of regional output, is expected to expand by 2% following a 3.6% post recession spike in 2010. The European Central Bank's (ECB) benchmark rate is expected to rise to 1.7% later this year.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, is expected to show Monday that it held at 110.3 in February, according to a Bloomberg News survey of economists. That’s the highest since records for a reunified Germany began in 1991.

On Sunday, German Chancellor Angela Merkel's party suffered a big electoral defeat in the city state of Hamburg, in the start of key regional elections in coming months.

The centre-right Christian Democratic Union won just 20% of the vote in Hamburg, Germany's second-biggest city as well as one of the country's 16 states, compared with 42.6% in the last election in 2008. The main opposition party, the Social Democrats, or SPD, won 50% of the vote, up from 34.1% in 2008, according to preliminary results released by German broadcaster ZDF.

The London Independent says SPD leader, Olaf Scholz, defeated his unpopular conservative opponent Christoph Ahlhaus by advocating rightwing pro- business policies which some critics argued were “more conservative” than the conservatives.

The Hamburg poll will be followed by crucial elections in the southern state of Baaden-Wurttemberg at the end of March. Merkel’s party, which has governed the state since World War II, is in danger of losing to the Greens and Social Democrats.

Deutsche Bank Research said in a report (pdf) published last week that roughly half of the expansion in GDP (gross domestic product) is being driven by net exports and half by domestic activity. Back in 2010 the growth mix was still about 30% to 70%, with the domestic side tipping the scales.

On average, 2011 will probably see the number of unemployed fall below the 3m mark, with the unemployment rate easing from 7.7% towards 7%.

The DBR report says Germany has exactly the right country and product mix in its export portfolio. This is impressively documented by the scale of Germany’s exports to China, nearly 70% of which constitute machinery and transport equipment, i.e. capital goods, and which expanded by 45% last year, while Germany’s total exports increased by "merely" close to 20%.

With capital goods accounting for over 45% of its total exports, Germany is the leading such exporter in Europe. Moreover, the importance of the dynamically growing emerging economies of Asia - - and of China in particular - - has noticeably increased over the past few years. In 2010 alone, the export share to China rose by one percentage point to over 5½% of Germany's total exports, putting them nearly at a par with exports to the United States, which accounts for about 6½% of German exports. All in all, more than 11% of German exports are shipped to the emerging markets and developing countries of Asia.

The report says GDP can be regarded as a combination of potential output and a cyclical component. The potential output of an economy refers to the total economic output that can be produced making use of the production factors labour and capital that are available at a given time. The calculation takes account of technological progress and assumes normal capacity utilisation.

The economists say that there is little disagreement among the major economic research institutes as regards potential growth for 2011. The Council of Economic Experts, like the IMF and the OECD, forecast 1 ¼% potential growth for the German economy in the current year. The DBR analysis also arrives at roughly this rate. Hence the current growth rate of potential output is roughly in line with the average of the last five years.

The economists say that even though the financial crisis has not severely harmed Germany's growth potential, demographic shifts mean there are still enormous challenges ahead. Germany's population will shrink by 20% by 2060. At the same time, the labour force aged between 15 and 65 years will decline by no less than 35%, as the baby-boom generation will soon start to reach retirement age and be replaced only partially by the cohorts born in years with low birth rates. The shrinking of the working-age population will accelerate considerably and exceed more than 1% per annum between 2020 and 2035. All other things being equal, this would imply stagnation in potential output.

DBR expect the ECB to start raising key rates in the second half of the year. By year-end the ECB’s refi benchmark rate could stand at 1.75% and rise further in 2012, provided that the euro does not persistently soar to new highs.

The current benchmark rate is 1%.

The economists expect the inflation reading to hover at around 2% in 2011 and remain in check at about 1 ¾% in 2012. In the forecast they assume that the oil price will increase only moderately, averaging $97 per barrel in 2011 and inching up to $98 per barrel in the following year.

The report says the burgeoning recovery and the upswing in the labour market should provide relief for public budgets in 2011 - - as already happened in 2010. Given the cyclical forces and a half percentage point reduction of the structural deficit, DBR says the annual general government deficit could realistically shrink to about 2 ¾% of GDP. This means that Germany would fall back into line with the budget criterion of the Stability and Growth Pact already in the course of this year.

The government debt ratio, which came to about 66% of GDP before the outbreak of the crisis, is therefore likely to peak at around 74% of GDP in 2011 and decline noticeably to less than 70% by 2016. The economists says this performance differs positively from that in other Eurozone countries, whose new debt will be far higher than in Germany and whose debt ratios will temporarily continue to climb.

According to European Commission calculations, the public debt level is set to increase by a further almost 10 percentage points in Spain by 2012, to 73%, while the readings in France and Portugal increase from 83% to around 90% and in Ireland and Greece by 17 percentage points, to 114% and 156%, respectively.

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