The world economy is currently caught between favorable fundamentals on the one side and the ongoing uncertainty from the threat of terror, regional conflicts and the high oil price on the other.

In their latest economic forecast presented in Frankfurt, the economists of Allianz Group and Dresdner Bank expect to see growth in the world economy of 3.3 percent in 2004 (2005: 3.1 percent). For the euro area, they forecast an increase in GDP of 1.5 percent this year and 2.1 percent in 2005, for Germany 1.4 and 1.6 percent.

"The main driver in the current cycle is real world trade. We have factored in world trade growth of eight percent in 2004 and five to six percent in 2005," according to Michael Heise, Chief Economist of Allianz Group and Dresdner Bank. The forecast is based on an average oil price of 31 and 28 US dollars in 2004 and 2005, as well as a renewed rise in the euro against the dollar up to the end of 2004.

The German economy has been picking up since the autumn of 2003. "Impulses from the world economy, the rebound on stock markets and low interest rates have all had a stimulating effect. Progress on consolidation in the corporate sector also helped the economy turn the corner," according to the economists of Allianz Group and Dresdner Bank. Following a somewhat weaker first half-year, the recovery is set to strengthen from the middle of 2004.

All in all, the sluggish pickup in domestic demand continues to dog the German economy. More dynamic growth will not set in until 2005, on the back of stronger consumer demand (+1.8 percent) and rising machinery and equipment investment (+7.5 percent).

"Exports will bolster growth this year and next, expanding by a good 5 percent and 6 percent after a moderate increase of only 1.2 percent in 2003," the report states.

Inflation will remain moderate at 1.2 percent (2004) and 1.6 percent (2005).

Unemployment is not expected to fall substantially until 2005. "The steeper rise in employment will help push average unemployment down 150,000 to 4.2 million, corresponding to an unemployment rate of 10.0 percent (EU definition: 9.1 percent)."

The report also looks at the reasons behind the ongoing structural weakness in Germany since 1993, which is also reflected in weak corporate earnings. Factors weighing on growth include soft private-sector demand, the trend in wage costs and price competitiveness, excess capacity in the building sector, misguided spending cuts and mistakes in rebuilding the east.

The main cause for concern is private consumption where, since 1997, annual growth has been around one percentage point below the EMU average. This stems from the high overall tax burden on private households and, above all, the poor performance on the labor market. Along with weak consumption, employment growth in Germany has been markedly lower than in the euro area.

In terms of rebuilding east Germany, the establishment of special economic zones is not the right way ahead. In general, the money being pumped into the east needs to be substantially more focused - above all, via targeted investment grants for the regional authorities.

"What we need is the creation of clusters, with the resulting positive impact on their surroundings, not the watering-can approach," according to Heise. In addition, broad economic reforms are called for in order to lift economic momentum in Germany as a whole, thereby speeding up the catch-up process in east Germany as well.

As with all content published on this site, these statements are subject to our Forward Looking Statement disclaimer, provided on the right.