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Europe's outlook darkens as German growth fades

Associated Press Modified: October 11, 2012 at 9:16 am •  Published: October 11, 2012

BERLIN (AP) — Europe's economic outlook darkened further Thursday when top economists slashed their growth forecasts for Germany and warned that public support for more financial aid to struggling countries was evaporating.

In a report for the Economy Ministry, leading economic research institutes said they now expect gross domestic to increase by only 1 percent in 2013 instead of 2.0 percent. They said financial woes in other eurozone nations were weighing on business confidence in the currency bloc's largest economy, hurting spending on new equipment and production facilities — a key component of growth.

Still, with six European nations in recession and the International Monetary Fund predicting just 0.2 percent growth for the eurozone next year, Chancellor Angela Merkel said it was incumbent upon Germany "to do things to stimulate the European economy."

"If we manage to keep our domestic consumption up, then that has of course the advantage that we can increase imports from other European Union countries,"she told reporters in Berlin.

The 17-country eurozone shrank 0.2 percent in the second quarter from the quarter before. Germany's economy grew 0.3 percent — not great, but it helped keep the eurozone downturn from ending up even worse.

The economic institutes said Germany's growth was at risk if eurozone leaders do not keep up their efforts to control the debt crisis, warning that new market tensions — which have calmed recently due to action by the European Central Bank — could make things worse. If the debt crisis should worsen, 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. Meanwhile, financial market conditions are calmer after the ECB 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.

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 German economic growth from 0.9 percent to 0.8 percent.

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