BERLIN Germany's government nearly halved its forecast for growth next year to one percent on Thursday due to dampened expectations for exports, compounding fears that Europe's powerhouse economy is facing a sharp slowdown.
Chancellor Angela Merkel's government cut its forecast for 2012 growth from a previous 1.8 percent, as well as reducing its outlook for this year to 2.9 percent from three percent.
"The pace of expansion has slowed down, as we expected," Economy Minister Philipp Roesler said, adding however that "our economy remains on a growth path."
The Economy Ministry, which makes the forecasts for the government, said weaker exports due to a global slowdown were the main reason for the easing pace of growth. Exports are seen rising 7.5 percent in 2011 and just 3.5 percent in 2012.
"Domestic demand will become ever more the pillar of economic growth in Germany," the ministry said. "Overall growth will be sustained almost exclusively by this over the course of this and next year."
Germany's export-driven economy has recovered swiftly from the financial crisis, outperforming its peers and providing a crucial growth engine for Europe.
German unemployment will continue to fall next year, with the jobless rate dropping to 6.7 percent from 7 percent in 2011, the Economy Ministry said.
But recent indicators have emphasized the prospect of German expansion easing due to a global slowdown, with industry output and orders slumping in August.
Forward-looking indicators are also gloomy. The influential Ifo business climate, due out on Friday, is expected to fall in October for the fourth month in a row.
The Economy Ministry said uncertainty arising from the debt crisis was halting the pace of global expansion.
A Reuters poll of more than 20 economists last week even suggested Germany is teetering on the brink of recession due to the deepening euro zone debt crisis, which is starting to spill over into the real economy.
With its revision, the government catches up with forecasts from think tanks and responds to gloomy economic data.
Germany's leading economic institutes last week cut their growth forecast to just 0.8 percent for next year after 2.9 percent this year.
German bluechips are also warning about the deteriorating outlook. Chipmaker Infineon (IFXGn.DE) last week blamed uncertainty among its customers, linked to the euro zone debt crisis, for an expected decline in sales.
Berlin remained upbeat, however, announcing plans for a tax reform resulting in relief of 6 billion to 7 billion euros from Jan 2013.
The long-awaited plans will focus on tackling "cold progression," the system by which citizens effectively earn less year by year because tax brackets are not linked to inflation.
Furthermore, private households' disposable income would rise by 3.2 percent and 2.9 percent respectively in 2011 and 2012, while inflation would accelerate by just 2.3 percent and 1.8 percent respectively.
(Additional reporting by Madeline Chambers, Gernot Heller and Erik Kirschbaum; editing by Anna Willard)