German growth is likely to be weaker than the government has forecast this year, the Ifo economic research institute said on Tuesday. Ifo president Hans-Werner Sinn said the Munich-based think tank was cutting its forecast because the outlook for Europe's largest economy had deteriorated in recent months. "Our forecast is for growth of 1.6 percent compared to last year," he told Reuters in an interview. "We've reduced it due to the dark clouds heading towards us from the United States." The German economy grew by 2.5 percent in 2007. Still, Sinn said Ifo was more optimistic about labour market developments in Germany this year than it had been previously. "We think unemployment will fall to 3.3 million (on average) from 3.8 million last year," he said.

In December, Ifo forecast German growth of 1.8 percent for 2008, and average unemployment of 3.49 million. The German government has forecast growth of 1.7 percent for this year. Looking ahead, Sinn said it was impossible at present to predict how the economy would perform next year. "The degree of uncertainty about 2009 is simply very high," he said. The Ifo chief was confident that price pressures in Germany would ease as the year progressed, forecasting an average inflation rate of between 2.1 and 2.5 percent. German inflation was 2.7 percent in January, according to a preliminary estimate.

Sinn backed the European Central Bank's decision to keep its key interest rate on hold at 4 percent in the face of a loosening of monetary policy in the United States and Britain. "And I wouldn't lower rates as long as it's not clear that the European economy has hit a slump," he said. "It's too early for interest rate cuts."

STIMULUS IF NECESSARY

Trade unions in Europe and countries including France have called on the ECB to cut rates, arguing it would help take pressure off the euro, which has appreciated strongly against the dollar. But German exporters are still performing well, profiting from having shifted production abroad and by hedging against exchange rate fluctuations on financial markets, Sinn said. "This has led to a certain immunisation," he added. "The euro is strong, but not as strong (in relative terms) as the deutschemark was in 1992," Sinn said. "Adjusted for inflation, the level back then would correspond to a euro-dollar exchange rate of $1.60. We're not there yet."

However, Sinn said global economic conditions still harboured risks for German exporters, and urged trade unions to exercise restraint on pay demands to keep costs in check. "The strategy of moderation on wages and prices has helped us," he said. "Unfortunately, we'll need wage restraint for a long time yet because the forces of globalisation besetting us across the planet with low wages are not going to decrease."

Despite his optimism about the labour market, Sinn said private consumption would grow by just 1.3 percent this year. Given all the risks, Sinn said the German government should get ready to adopt an economic stimulus package if necessary. "Cutting taxes would be the most effective remedy, because that has an impact right across the board," he said.