Ifo raises German growth forecast to 1.7 per cent

Growth next year in Germany, Europe's largest economy, will be stronger than previously anticipated, powered by accelerating …

Growth next year in Germany, Europe's largest economy, will be stronger than previously anticipated, powered by accelerating exports and a revival in investment, the Ifo research institute forecast today.

The Munich-based think tank said in its latest outlook on the economy it expected German gross domestic product (GDP) to expand by 1.7 per cent next year compared with a June estimate of 1.2 per cent.

It predicted 0.9 per cent growth for 2005, a tenth of a point higher than before.

Ifo said the outlook for Germany was good, noting that strong international demand would keep the country's export motor firing strongly.

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"The economy really is picking up," said Ifo President Hans-Werner Sinn in Munich. "After five years, there are clear signs that the economic lull has been overcome."

Ifo expects investment to gain 2.9 per cent next year, almost five times as much as it had earlier forecast.

It saw exports expanding some 7.5 per cent in 2006 after 6.2 percent in 2005.

The institute also said it expected the European Central Bank (ECB), which raised interest rates for the first time in five years at the start of this month, to hike them by another quarter point in the summer of next year.

Ifo was critical of the central bank's decision to increase borrowing costs, saying it was a "risky" move and it would have been better to wait until the euro zone recovery had deepened. The ECB increased rates after warning about the risks of inflation.

The bank has said that annual euro zone inflation may not get below two per cent until the end of 2007.

"All in all, the ECB's assessment of inflation risks seems clearly exaggerated," Ifo said.

Ifo forecast average euro zone inflation of 1.9 per cent for 2006 after 2.2 per cent this year.