Berlin Cuts Growth Forecast, Slams ECB

Following flurry of disappointing data recently and sharp downward revisions in growth forecasts by a host of other organisations, Germany's Economy and Labor Minister Wolfgang Clement told a news conference in Berlin that the government was cutting its growth forecast for the current year to 1.0 percent from 1.6 percent previously.

Berlin "is counting on growth of between 0.75 percent and 1.25 percent or a median of 1.0 percent for 2005. And gross domestic product (GDP) is expected to grow in range of 1.5-2.0 percent or 1.6 percent in 2006," Clement said.

"The (downward) revision takes into account the less favorable basis in the fourth quarter of 2004 and oil price developments," he explained.

Earlier this week, Germany's six top think-tanks -- -- DIW, HWWA, IW, RWI, IWH and Ifo -- slashed their 2005 growth forecast to just 0.7 percent from 1.5 percent previously. The International Monetary Fund and the EU Commission also recently slashed their German forecasts to 0.8 percent.

Real-world data

The pessimism appears to be backed up by real economic data. Germany slipped into shallow recession at the end of last year, revised data published by the federal statistics office showed on Thursday. There seems to be little evidence that things will improve any time soon.

Exports, the sole driver of growth in the past, look set to slow as the global economic upturn runs out of steam. No new impulses can be expected on the domestic side, with unemployment stuck at just under five million and consumer demand in the doldrums for the

past three years.

Clement insisted that activity would pick up noticeably in the first quarter of 2005. The government was pencilling in quarterly growth of "just over 0.5 percent" in the period from January to March, he said.

He insisted that the "economic upturn will continue in the course of this year and next year" as domestic demand, previously the Achilles' heel of the economy, recovered. Companies would use strong increases in earnings to step up investment, Clement said. And household consumption would gradually pick up as taxes were reduced and the labor market turned around.

Italy, Germany hit out at ECB

Germany and Italy, the euro zone's biggest and third-biggest economies, hit out at the European Central Bank on Thursday, arguing that the current level of interest rates

was too high in face of sluggish growth in the region and the strength of the euro.

Italian Prime Minister Silvio Berlusconi launched the most virulent attack on the ECB, saying the bank's inflation-focused policies were "destructive" and harmed the competitiveness of the 12-country euro zone.

The ECB "has the objective to contain inflation, and it's only doing that," Berlusconi said. "It's not working, as we would like it to, to keep the value of our currency lower with respect to others."

Strong euro

The euro has risen by about eight percent against the dollar over the past year, undermining European exports by making euro-zone products more expensive than rival products made outside the euro area.

The single currency is currently changing hands at around $1.30, up from $1.18 at its launch in 1999. In theory, a reduction in interest rates could clip the euro's wings because it would make investing in euro-denominated assets less attractive.

Germany's Economy Minister Clement joined in the fray, even if he was less outspoken in his criticism of the ECB. But he nevertheless implied that a cut in euro-zone borrowing costs could help kick-start his country's stymied economy.

The current level of euro-zone interest rates -- the ECB has held its central "refi" refinancing rate steady at 2.0 percent since June 2003 -- "does not reflect the economic situation in Germany," Clement said.

Germany currently has one of the lowest inflation rates in the single currency region -- 1.5 percent in April compared with an average of around 2.0 percent for the euro area as a whole -- and its economy is one of the worst-performing.

One size fits all?

The problem for the ECB is that it has to set interest rates for all 12 countries that share the euro and other euro-zone countries, such as Ireland and Spain, are enjoying much more robust growth and their inflation rates are a lot higher.

And while the guardian of the euro seems unlikely to raise its interest rates in the coming months, its president Jean-Claude Trichet (photo, right) recently ruled out an easing of monetary conditions, despite the calls for lower rates.

The ECB is notoriously sensitive about politicians attempting to meddle with its interest-rate decisions and there have been suggestions in the past that the ECB delayed rate cuts so as not to be seen to be bowing to political pressure.