Germany's six leading economic institutes on Tuesday lowered their forecasts for growth this year and predicted the economy would expand too slowly to stop Berlin busting European Union budget rules again next year.
In a semi-annual report, the institutes estimated gross domestic product would rise by 1.5 percent this year - instead of the 1.7 percent they expected last October - after shrinking in 2003. They also forecast 1.5 percent growth for 2005.
"The German economy will only gradually gain momentum in 2004. In 2005 the pace of economic growth will not increase further," the institutes wrote.
Economy Minister Wolfgang Clement promptly called the report too pessimistic, saying growth would be stronger than the institutes expected and predicting Germany should still be able to get its 2005 budget deficit back below the EU's three percent of GDP limit.
The government currently sees 2004 growth of 1.7 percent in its budget plans, and 2005 growth around 2.25 percent.
In their report, the institutes forecast the budget deficit would be 3.7 percent of GDP this year - marking its third successive year above the three percent limit set by the EU Stability and Growth Pact - and shrink only to 3.5 percent in 2005.
Mirroring splits in the EU about what should happen to the Stability and Growth Pact, the institutes were divided on what action Germany should take.
Four said spending and tax subsidies should be cut to respect the rules of the Pact in 2005, but two - DIW in Berlin and IWH in Halle - said more austerity would hurt the recovery and they called instead for the budget to be consolidated over the medium term.
DIW said government policy should focus on holding spending growth to 1.5 percent a year and letting revenues fluctuate with the economy.
Despite the lowering of their growth forecasts, the institutes said there was no need for the European Central Bank to cut interest rates again unless inflation looked set to drop sharply.
They forecast the ECB's key rate would remain at two percent until the end of 2005.
Their report said that to achieve a deficit of three percent of GDP in 2005, additional revenue raising measures or spending cuts worth 12 billion euros over 2004-05 would be required.
The European Court of Justice is due on Wednesday to hear the Commission's case that governments broke EU law.