LEAD: Berlin cuts economic growth forecast but rules out recession

Jan 18, 2012, 12:56 GMT

Berlin - The German government cut its economic growth forecast for the year Wednesday, saying it expected Europe's biggest economy to slow sharply but avoid recession, despite the risks posed by the eurozone debt crisis.

After two years of solid economic growth, Economics Minister Philipp Roesler said the nation's economy would expand by just 0.7 per cent in 2012, amid a drop off in export demand.

The economy, however, should pick up speed again next year with the government forecasting a growth rate of 1.6 per cent.

Berlin had previously expected the economy to expand by 1 per cent this year.

But while releasing the economics ministry annual report in Berlin, Roesler rejected talk of Germany slumping back into recession this year, insisting that the nation remained on a growth path.

'Our economy is robust,' he said, adding that the domestic economy - in particular private consumption - would be the major driver of growth.

'Germany is - and remains - the anchor for stability and growth in Europe.' Roesler said. 'There can be no talk of recession.' The ministry's report said its forecast was based on Europe finding a solution to its debt crisis this year.

Roesler conceded, however, that the main risk facing Germany's economic outlook was 'a worsening of the crisis in Europe.'

The government's latest forecasts followed the release on Tuesday of a survey, by the Mannheim-based ZEW economic research institute, showing a surge in investor confidence in the country during January.

The ministry predicted that domestic demand this year would be underpinned partly by a fall in unemployment to 6.8 per cent - the lowest level in 20 years - and a 3-per-cent rise in private incomes. Inflation is expected to slip back to 1.8 per cent.

The release of Berlin's latest economic outlook coincided with Germany's electrical and electronics industry association (ZVEI) predicting that sales of electrical goods in the nation would grow by up to 2 per cent this year.

However, the ZVEI warned that exports - in particular to the rest of Europe - would stagnate as a result of the debt crisis.

Berlin's economic growth projections are more optimistic than the consensus among private economists, who expect the economy to grow by 0.5 per cent in the coming 12 months. This year's slowdown comes after booming exports helped to drive the nation's growth rate to 3.7 per cent in 2010 and 3 per cent in 2011.

Since then however, the nation's key export markets in Europe have been hit by the debt crisis, with several eurozone nations mired in recession.

After racing ahead by 8.2 per cent last year, exports are forecast to grow by just 2 per cent.