Germany's economic recovery is fragile and risks to even moderate growth remain, the International Monetary Fund said on Tuesday as it scaled back growth forecasts.
German gross domestic product should grow by 1.2 percent this year, the IMF said in its report, cutting an earlier estimate for 1.5 percent growth in Europe's largest economy.
The report, a conclusive summary of a review known as an Article IV consultation, expected growth to accelerate to 1.7 percent in 2011 — also a lower figure than the 1.9 percent previously forecast.
"Economic recovery is likely to be moderate and fragile, reflecting its reliance on export demand and risks from continuing financial sector problems," the IMF said in the report.
Germany was hit especially hard by the global crisis last year, when the economy shrank by a record 5 percent, as it is heavily dependent on foreign trade for growth.
As its recovery is now expected to be export-led, any wavering in foreign demand could dent it given that consumption remains weak. Falling real incomes and worries over unemployment make consumer spending unlikely to boost growth this year.
The IMF recommended Germany take measures to boost domestic demand, but admitted it would be difficult given the need to unwind stimulus measures and labor market support.
"Simultaneous measures to increase labor market flexibility and reduce obstacles to product and service market development would enhance efficiency and foster domestic demand," it said.
The report supported Germany's continued fiscal aid to the economy, but said a withdrawal should begin next year and that any tax cuts should be matched by budget cuts.
"Directors saw a need to start fiscal consolidation once the recovery becomes self-sustaining, which is projected for 2011," it said.
"In this context, any tax cut in 2011 should be accompanied by compensating budgetary measures," it added.
Chancellor Angela Merkel's coalition government has passed tax relief worth 8.5 billion euros ($11.41 billion) for 2010, and has been debating whether to scrap, scale back or postpone further tax cuts envisaged from 2011.
Finance Minister Wolfgang Schaeuble said this month the government would announce proposals for tax cuts between mid-May and the end of June, but not before a key May 9 state election.
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