Germany's economic recovery will broaden next year as investment spending and private consumption pick up and export demand continues to underpin growth, the BDB private banks' association predicted today.
However, exchange rate fluctuations represent a "significant area of uncertainty" and if the euro strengthens to between $1.45 and $1.50 in the coming weeks then the European Central Bank should intervene in the market or cut interest rates to try to halt the single currency's ascent, the group said.
Adjusted for working days, Germany's economy is set to expand by 1.6 per cent next year after 2004 growth of 1.3 per cent , the BDB predicted.
The government also expects workday-adjusted GDP growth in 2004 of 1.3 per cent but sees a quicker expansion next year of 1.9 per cent .
"If the euro exchange rate remains around the current level through next year, we expect a slight tightening of European monetary policy in the second half," the BDB said.
"But if the euro were to strengthen drastically it would create room for rate cuts which European central bankers should take advantage of," it added.
The euro surged to a record high at $1.3470 yesterday but fell back around one per cent today.
The single currency has climbed about 9 per cent since the beginning of September, threatening to erode the competitiveness of firms exporting outside the 12-nation euro zone. The BDB said it expected the euro to strengthen further but cautioned that a high level of market pessimism about the dollar would make it very difficult for the ECB to intervene successfully to prop up the US currency.