Germany's council of economic advisers on Wednesday predicted Europe's biggest economy would expand at roughly the same pace next year as in 2004, but said high oil prices and a strong euro were significant risks. Germany's gross domestic product will increase by 1.4 percent in 2005, not adjusted for working days, compared with 1.8 percent this year, the council, known as the "five wise men", predicted in its annual economic report.
Adjusted for fewer working days next year, the economy will grow at more or less the same pace as 2004, supported by sustained foreign demand for German goods and a gradual pickup in domestic demand, according to the report, entitled "External successes - internal challenges".
"However, there remain not inconsiderable risks from a possible further strengthening of the euro and an increase in oil prices," the report warned.
Germany's economy grew a much weaker-than-expected 0.1 percent in the third quarter of this year, as high oil prices and the euro's appreciation dampened the export growth that had been powering the economy amid insipid domestic demand.
However, panel head Wolfgang Wiegard said the latest forecasts did not signal a slide back into the stagnation that has plagued the German economy for the past three years.
"There are the downside risks, but they are not so big that we feel we have to draw up an alternative scenario," he told a news conference.
The German government expects the economy to grow 1.8 percent this year and 1.7 percent in 2005. Adjusted for working days, it predicts 2004 growth of 1.3 percent and expansion next year of 1.9 percent.
DOMESTIC RECOVERY: German Chancellor Gerhard Schroeder said the panel's forecast of slower growth was due to the working day effect and there was evidence of a tentative recovery in domestic demand.
"There are signs of a pickup in capital investment and an increase in imports that point to a gradual strengthening in domestic demand," Schroeder said after the wise men presented him with their report in Berlin.
"I hope the Christmas season will contribute to reinforcing or stabilising this trend," Schroeder added.
While oil prices have retreated more than 17 percent since hitting a record high of $55.67 in late October, the euro surged to a fresh record against the dollar above $1.3030 on Wednesday. The single currency has risen about 25 percent since the start of last year.
The wise men, who assume a euro/dollar rate of $1.27 for their forecasts, said on Wednesday a lasting 10 percent increase in the euro's value against the dollar shaves about 0.4 percentage points from economic growth.
The European Central Bank will probably tighten borrowing costs moderately, if anything, next year, though monetary policy would remain expansionary, the wise men predicted.
Germany's budget deficit is likely to amount to 3.5 percent of gross domestic product (GDP) in 2005, busting the European Union's deficit cap of three percent of GDP for a fourth year.
"The state of public finances will not improve noticeably next year either," the report said. However, some extra measures planned by Finance Minister Hans Eichel could shrink the shortfall below the three percent limit, Wiegard said.
Eichel has pledged to bring Germany's deficit below three percent next year and Schroeder on Wednesday repeated that the government was committed to that goal.
The panel of wise men, which is made up of four men and one woman, said providing forecasts for the labour market for next year was difficult due to government reforms set to take effect in January.
However, they said employment growth should continue in 2005, with the number of Germans in work posting a gain of around 150,000, the first increase since 2001.
The Council said the reforms could push registered unemployment to a record five million in February and over 2005 as a whole the jobless total was likely to rise 150,000. However, this was due purely to the statistical changes.
"According to the old method of calculation, unemployment will remain unchanged next year," the council said.