German economic growth will be lower than previously expected in 2004 and 2005 as high oil prices and high unemployment subdue business and consumer activity, the International Monetary Fund said today.
The Washington-based IMF said it now expected Europe's largest economy to grow by 1.9 per cent this year and 1.5 per cent in 2005, down from forecasts of 2.0 and 1.8 per cent respectively originally issued in late September.
It also predicted Germany's budget deficit would breach European Union rules for a fourth successive year in 2005.
Mr Ajai Chopra, IMF mission chief to Germany, said in a conference call with reporters that domestic demand remained "dormant" and the reliance of Germany's economic recovery on exports was fanning uncertainty about its sustainability.
"That said, we did not find evidence that the links between external demand and domestic demand would not eventually come into play and boost investment and employment," he said.
The IMF underlined that, adjusted for the number of working days, its revised GDP forecasts still indicated there would be a moderate expansion in underlying growth next year.
Exports have pulled Germany's economy out of three years of stagnation. But private consumption, which accounts for about 60 per cent of gross domestic product, has remained weak amid rising unemployment, which advanced to a six-year-high in September.
There are fears high oil prices may now slow the global economy and stifle any recovery in consumer spending.
The IMF said Chancellor Gerhard Schroeder's unpopular raft of welfare cuts, pension freezes and healthcare reforms were "important strides", but added Germany's ageing population was still a big risk to its social security system.
"Further reforms will be needed to raise potential output growth and prepare for population ageing," it said.
Concern about further reforms might be the reason consumers were still reluctant to spend, Mr Chopra said. "Once the public is satisfied that the welfare state is sustainable, and that additional cuts are not required, and once Germany's high labour costs have been contained so that jobs look more secure, it is likely spending will pick up again," he said.