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European Economies: DIW Cuts German Growth Forecast (Update3)

March 10 (Bloomberg) -- Germany's DIW economic institute cut its first-quarter growth forecast, saying there are still no clear signs that a recovery is taking hold in Europe's largest economy.

The economy will expand 0.1 percent from the fourth quarter, when it grew 0.2 percent, said the Berlin-based DIW, one of six institutes that compile a twice-yearly economic report for the government. The institute previously predicted 0.4 percent growth.

``The economy does not appear to be at the start of a noticeable recovery,'' said the DIW in a report. Germany ``is only emerging from stagnation in a sputtering fashion.''

Germany last year was the worst performing economy among the Group of Seven major industrialized nations, contracting for the first time in a decade, as job losses prompted consumers to keep a rein on spending. At 4.29 million, the number of unemployed last month was 190,000 higher than when Gerhard Schroeder became German chancellor in October 1998.

Factory orders and industrial production declined in January, unemployment rose for a second month in February and business confidence fell, prompting economists at banks including Morgan Stanley to pare growth estimates. The economy shrank 0.1 percent last year, after expanding less than 1 percent in the previous two years, making it the longest slump in more than half a century.

``There is a very weak upward trend in the economy,'' Bundesbank President Ernst Welteke told reporters in Berlin today.

`Worse Start'

The DIW's reduced forecast casts doubt on the government's prediction for growth of between 1.5 percent and 2 percent this year. The Halle Institute for Economic Research, another of the institutes, on Monday cut its forecast to 1.5 percent from 1.7 percent. That's still above Lehman Brothers Holdings Inc.'s estimate of 1.4 percent, the same level the DIW has forecast.

The DIW is the largest of the six economic research institutes, which also include Munich's Ifo institute, Kiel's IfW Institute for World Economics, Essen's RWI and the Hamburg-based HWWA. Their last joint report, published almost five months ago, predicted German growth would reach 1.7 percent this year.

``The data we've seen in recent days suggests the recovery may be weaker than initially thought,'' said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. ``By and large, the economy got off to a worse start than we thought.'' Commerzbank has forecast growth of 2 percent for this year.

Consumer Concern

Growth is being hobbled by falling consumer spending, the largest part of the economy. Households are holding back on purchases amid an unemployment rate of 10.3 percent and job cuts at companies including Volkswagen AG, Europe's largest carmaker, and Thomas Cook AG, Europe's second-biggest tour operator.

Retail sales over the Christmas period were 25 percent lower than last year and sales will stagnate this year, the HDE group of retailers said on Monday. Tax cuts worth 15 billion euros ($18.4 billion) brought in by Schroeder's government in January have so far failed to spur the economy, the DIW said.

Schroeder, who is facing a 14 elections at local, state and European level this year, can't rely on the European Central Bank to spur domestic demand by cutting interest rates which are already the lowest seen in Germany since 1876.

ECB President Jean-Claude Trichet last week said borrowing costs across the euro region are ``appropriate,'' rejecting calls from Schroeder and French Prime Minister Jean-Pierre Raffarin to cut rates. The ECB may give further clues to its monetary stance when it publishes its monthly report tomorrow.

Exports Remain Key

Economic growth ``is essentially being carried by impulses from foreign trade'' even though the euro has risen 21 percent against the U.S. dollar since the start of 2003, the DIW said.

German exports rose for the sixth time in seven months in January, the Wiesbaden-based Federal Statistics Office said today, defying the euro's appreciation to a record against the dollar this year. Sales abroad, adjusted for seasonal swings, climbed 6 percent from December, the most since June 2002.

``Economic development is more contingent on global growth than on currency developments,'' said Welteke, who also sits on the ECB's 18-member governing council.

The stronger euro is weighing on growth in other parts of Europe. Growth in the $9 trillion economy of the dozen euro nations slowed to 0.3 percent in the fourth quarter from 0.4 percent in the third. The European currency on Feb. 18 rose as high as $1.2930, the highest level since its introduction five years ago. The euro bought $1.2224 at 5:45 p.m. in Frankfurt.

Italy's economy, the fourth largest in the dozen-nation region using the euro, stalled in the final quarter of last year after growing 0.4 percent in the previous quarter, the statistics office Istat said today.

``Up to now there have been no firm indications of a self- sustaining recovery, neither domestically nor among our European Union partners,'' said Dietmar Harting, head of the ZVEI electrical and electronics industry group, which represents companies including DaimlerChrysler AG and Siemens AG.