2012-02-11 17:49:03 - New Country Reports market report from Business Monitor International: "Germany Business Forecast Report Q2 2012"

Core Views A more challenging global economic environment and the intensifying sovereign debt crisis plaguing the eurozone will continue to weigh on business confidence, undermining the outlook for German fixed capital investment growth and household consumption. Declining external demand further limits the prospect of a stronger net export contribution to headline growth through to 2012. With the labour market set to weaken in 2012 relative to the previous year, we believe that federal government expenditures are likely to begin to grow. With social security contributions set to climb in 2012, we believe that the budgeted decline in federal government expenditure to the tune of 1.6% to EUR 301.0bn in 2012 is overly ambitious. We believe that much of the Green

party's success over the course of 2011 rests with the robustness of the German economy and the country's strong labour market, allowing an increasing number of affluent, older and well-educated voters to focus on domestic and environmental issues rather than immigration and job security. Major Forecast Changes We are now seeing a more subdued economic growth trajectory ahead for the German economy. We have lowered our 2011 real GDP growth forecast to 3.1%, from 3.5% previously, keeping us barely above consensus, and see real GDP growth slowing to 1.3% in 2012, down from our previous forecast of 2.0%. We expect a more moderate rate of fiscal deficit narrowing over the coming years. Forecasting a general government fiscal shortfall of 1.8% of GDP in 2011, down from the 3.4% of GDP deficit recorded in 2010, we now see the deficit narrowing only modestly to 1.7% of GDP in 2012, slightly less than previous projections for a 1.6% shortfall. Revisions to our economic growth outlooks for Europe, the US and China mean that we now expect a sharper narrowing of Germany's current account surplus in 2012. Weaker external demand will see German export growth slow sharply to just 2.2% in 2012, from 12.0% pencilled in for 2011. We are now forecasting a current account surplus of just 3.9% of GDP in 2012, from our previous forecast of 5.0%. Key Risks To Outlook The latest downward revision to our 2011 real GDP growth forecast is largely the result of upgrading our full-year import growth forecast to 8.0% from 5.8% previously, and expecting a less pronounced gap in export growth over import growth this year. Although we believe that upside risks to our import growth forecast are muted, we caution that a sharper deceleration of the global economy in H211 and an escalation of the eurozone sovereign debt crisis - potentially resulting in a disorderly default by Greece or the collapse of a major financial institution in Europe - would present substantial downside risks to our growth forecast for this year. Germany is already the largest guarantor of the European Financial Stability Facility, pledging 27.1% of the entire fund (EUR 119.4bn). With the European Stability Mechanism scheduled to take over in July 2013, France at risk of losing its AAA sovereign credit rating, and bank recapitalisations in Q411 and Q112, Germany's burden in bailing out troubled peripheral states will grow.
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