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German economy set to recover, risks remain

FRANKFURT — The conditions are in place for the German economy, Europe’s biggest, to recover this year — and lead the eurozone back to growth — unless the crisis intensifies further, the IMF warned on Tuesday.

“Several conditions are in place in Germany for a domestic demand-led recovery following the downturn at end-2011,” the International Monetary Fund wrote in a new report on Germany.

Germany’s economic performance throughout the crisis so far “has been remarkable, despite a difficult environment,” the head of the IMF mission to Germany, Subir Lall, told a telephone conference call.

Germany expanded strongly for most of last year, but growth shuddered to a halt in the final quarter, when it contracted by 0.2 percent.

Nevertheless, the dip was only short-lived and gross domestic product (GDP) rebounded again to expand by 0.5 percent in the first three months of this year.

While the IMF was pencilling in much slower GDP rowth of around 0.1 percent in the second quarter, the economy would gather momentum and reach its potential for growth of around 1.25 percent in the second half of the year, Lall said.

Healthy corporate and household balance sheets, higher wages, well anchored inflation expectations, and low borrowing costs would act as a boost by keeping domestic demand strong, the IMF said.

Taking 2012 as a whole, the fund said it was projecting GDP to expand by 1.0 percent, down from 3.1 percent in 2011. Growth would then pick up to 1.4 precent in 2013, it predicted.

The near-term outlook was, however, “clouded by a number of downside risks,” the IMF cautioned.

The biggest of these would be a possible further intensification of the eurozone’s sovereign debt crisis, “which would spill over into Germany directly through real and financial channels, and indirectly through dampened business and consumer sentiment,” it said.

Slower global growth prospects and an abrupt rise in oil prices could also cloud the outlook for activity, it said.

As Europe’s biggest economy, Germany could play a “pivotal role in addressing the challenges posed by the crisis” and “reinforce reform momentum in the euro area,” the IMF suggested.

In economic terms, it could rebalance its own economy away from the hitherto strong dependence on exports and seek to strengthen domestically driven growth.

That would “help raise the economy’s potential ... while generating positive outward spillovers” elsewhere in the single currency area, the IMF said.