In their traditional spring report, Germany's leading economic think-tanks said that "the German recovery will only gradually gain momentum in 2004, and in 2005 the pace of economic growth will not increase further." In real terms, the increase in German gross domestic product (GDP) would be 1.5 percent for this year and next, the institutes predicted.

That puts Germany at the low end in the 12-country euro zone, where the average growth is expected to be 1.6 percent in 2004 and 2.0 percent in 2005.

The new forecasts reflect a downward revision from the institutes' previous report published last fall, when they had been calculating a growth of 1.7 percent for this year. "The German economy is slowly emerging from stagnation," the report stated at the time.

In the first few months of 2004, output and demand were on the increase again, "albeit at a slow pace," the spring report acknowledged. "The German economy is still sleepy," said Gustav Horn of the Berlin-based DIW institute for economic research on Tuesday.

World growth triggers German recovery

The six institutes referred to the strong euro as one factor behind Germany's recovery, but largely regarded a general improvement in the world economy as responsible for the 2004 upturn. "Despite the marked appreciation of the euro, impulses for recovery came from the vigorous economic development in the rest of the world economy," they observed.

"In addition, the level of uncertainty has declined, partly due to the end of the Iraq war, so that the expansionary stance of monetary policy is increasingly having effects on the German economy, as well as on the rest of the euro area," the experts wrote.

However, the think-tanks cautioned that the negative effects of the strong euro were "still prevalent" and would "lessen the impact of the economic upswing outside the euro area." But as long as the dollar does not continue to fall, "this factor will lose some of its importance in the latter part of 2004."

Unemployment still high

Despite the gradual economic recovery, the institutes foresaw only minimal progress in reducing the jobless rate. They predicted that the total number of people out of work in Germany would average 4.332 million in 2004 compared with 4.376 million last year. For 2005 they predicted only a marginal drop to 4.276 million people.

Such figures put Germany's unemployment rate of 10.2 percent for 2004 much higher than the euro zone average of 8.8 percent, and serve as a further weight slowing down economic growth.

Deficit stays above 3.0 percent

In terms of Germany's public finances, the institutes indicated there was little sign of progress in pulling the country out of its budget deficit.

The report said that the Germany public deficit, which already amounted to 3.5 percent of GDP in 2002 and 3.9 percent in 2003, would once again violate the 3.0 percent ceiling laid down in the European Stability and Growth Pact for the third and fourth year running.

The experts predicted a deficit ratio of 3.7 percent in 2004 and 3.5 percent in 2005.

Such forecasts clearly contradict Berlin's pledges to bring the deficit back below 3.0 percent next year, and will most likely trigger a harsh response from Brussels which already threatened to punish Germany last year for failing to reign in its soaring deficit.