German economic growth seen halved due to crisis

DAVID RISING and DAVID McHUGH, Associated Press

BERLIN -- Germany's leading economic research institutes have halved their prediction for the country's growth next year, saying the financial woes of other European nations continue to weigh heavily on the bloc's largest economy.

In a joint report for the Economy Ministry released Thursday, the institutes said they now expect gross domestic to increase by only 1 percent in 2013. Fears of more trouble and turmoil from indebted countries are weighing on business spending on new equipment and production facilities, a key component of growth.

They warned that even that modest amount of growth they are predicting depends on political leaders now taking more decisive action to further stabilize the 17-country eurozone. If the debt crisis should worsen and borrowing costs for troubled countries spike, they said, "there is a great danger Germany will fall into recession."

The German economy is expected to keep growing mainly because exports are holding up well, the economists said, and recent steps by the European Central Bank have helped calm financial markets. The ECB has said it could buy government bonds issued by indebted governments such as Italy and Spain, if they promised to take steps to reduce debt. Such purchases would lower the high borrowing costs that threaten to push them to financial ruin.

"Over the course of the year ahead economic activity in Germany is expected to improve, since the situation in the eurozone should gradually ease and the rest of the world economy should gain greater momentum," they said in their twice-yearly report.

Yet they warned that the ECB's chances of lowering borrowing costs for governments and companies in the crisis countries will largely depend on whether politicians' "economic policy can restore the confidence of financial investors, companies and households."

Budget cuts by governments trying to reduce debt would dampen growth, they said, but help reduce uncertainty that is plaguing the eurozone.

So far, they cautioned, there are "no signs of a long-term economic policy solution to the crisis" and "risks to stability remain high."

Voters in more financially solid countries were getting restless about being put on the hook for bailout loans like the ones that rescued Greece, Ireland and Portugal. Domestic debates in Germany and Finland, where voter skepticism about bailouts runs high, "have shown that the readiness to increase assistance loans or make transfers is evaporating." That increases the importance of reforming economies to increase growth and reduce deficits.

The report _ prepared by Germany's top six economic research institutes together with one in Austria and another in Switzerland _ also cut the forecast for 2012 economic growth from 0.9 percent to 0.8 percent. The institutes said there are "a large number of signs that overall economic expansion will weaken toward the end of the year."