German slowdown to steady

Germany's economy is unlikely to pick up this year

Germany's economic slowdown should stabilise this summer, but there will be no improvement this year, the Ifo research institute said on Wednesday.

We think that the ECB will cut rates soon but we forecast a cut of only 25 basis points.

Willi Leibfritz
Chief economist, Ifo

The think-tank maintained its forecast of 1.2% growth for 2001, but added for the first time that it could go even lower, offering a range of 1% to 1.5%.

"The German economy might reach its lowest level in the summer of 2001," it said.

In June, Ifo slashed its growth forecast to 1.2% from 2.1% following months of weak economic data and business surveys.

ECB rate cut

The latest figures have added to expectations that the European Central Bank will cut interest rates soon.

Ifo cut its forecast for euro zone inflation to 2.75% from 2.9% for this year, and to 1.75% from 2% for 2002.

German inflation for July, which amounts to a third of the euro zone's overall figure, fell on Tuesday by 0.4% to 2.7%.

Ifo added that its business climate index for June has "markedly" dropped to levels even lower than at the end of 1998 and early 1999 following the Asian crisis.

"We think that the ECB will cut rates soon but we forecast a cut of only 25 basis points. But I'd personally would recommend a cut of 50 basis points at the next meeting," Willi Leibfritz, Ifo's chief economist, said.

The ECB council meets next on 2 August before its four-week summer break and reconvenes on 30 August.

An upturn?

"We expect that the German and euro zone economies will stabilise over the course of this year," Mr Leibfritz said in a statement.

"An upturn in the global economy should boost exports, while the weak euro will also contribute," he said.

But Ifo expects the number of jobless in Germany to exceed the levels of a year ago to hit an unadjusted 4.2 million in January or February 2002.