Germany stands firm on austerity as it cuts growth outlook

[Berlin] The German government insisted on Tuesday that it will not change economic policy despite cutting growth forecasts sharply as clouds pile up over Europe's biggest economy.

The worsening outlook for German growth adds to concerns about the eurozone economy, which some analysts say is flirting with recession and is already holding back world recovery.

"There is no reason to abandon or change our economic or fiscal policy," despite increasing calls within Germany and in other neighbouring eurozone countries to increase public spending to kick-start growth, Economy Minister Sigmar Gabriel told a news conference.

Presenting the government's distinctly gloomier growth forecasts for this year and next, Gabriel said that "increasing debt in Germany will not generate additional growth in Italy, Spain, France and Greece." Germany, traditionally Europe's economic engine, "is not experiencing a downturn, but remains on a path of expansion," Gabriel said.

"A dip in growth isn't a natural catastrophe." Gabriel revealed that Berlin is now pencilling in growth of 1.2 per cent in 2014 and 1.3 per cent in 2015, instead of the previous forecasts of 1.8 per cent and 2.0 per cent respectively.

For both years that represents about a one-third reduction of expected growth.

"The German economy is currently in difficult waters in terms of foreign trade," Gabriel said.

"Geopolitical crises have increased uncertainty in Germany and sluggish global growth is weighing on the economy," the minister said.

Nevertheless, "domestic economic forces remain intact, with the robust labour market forming the foundation to that," Gabriel continued.

Wages and employment were continuing to rise, boosting consumer spending and spending on home construction, he said.

"As soon as the international environment improves, the competitiveness of German companies will bear fruit and the German economy will return to a path of solid growth next year," Gabriel insisted.

The outlook for Germany is looking increasingly gloomy, however.

Earlier, a widely watched barometer of investor confidence, the ZEW index, slumped to its lowest level in 23 months as crises such as the one in Ukraine soured companies' appetite for investment.

And last week, the country's four leading think-tanks also slashed their growth forecasts, blaming the Ukraine crisis and lacklustre global growth.

"Investment plays a key role for economic momentum and for long-term growth and prosperity," Gabriel said.

"Germany must invest more in its infrastructurer. And the conditions for private investment must also be improved," he said.

Until recently, Germany had managed to escape the worst of the eurozone crisis, thanks to difficult and painful reforms pushed through a few years ago.

Notching up growth while most of its eurozone partners were mired in recession, Berlin has persistently argued that other countries have no choice but to follow the path of budget rigour, or austerity, too.

But amid growing signs that the German economy is also now stalling, the anti-austerity movement is gaining confidence.

At a meeting of some EU leaders in Milan last week, French President Francois Hollande threw down the gauntlet to German Chancellor Angela Merkel by saying that instead of further austerity measures to trim France's budget deficit, the rules should be eased to reverse flagging growth across the eurozone.

The leading German think-tanks took a similar line, arguing that Germany "isn't making sufficient use of the margin for financial manoeuvre with regard to investment, such as in infrastructure." AFP

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