Uncertainty in the euro zone is hitting Germany, the IMF said yesterday as it halved the projected growth rate for Europe’s largest economy this year.

In its annual report on the German economy, the IMF said Germany should avoid “overperforming“ on fiscal consolidation as economic weakness continued.

It said it expected only a weak rebound given continued subdued business investment.

'Uncertainty'
"Amid still elevated euro area uncertainty, we now project GDP in Germany to expand at around 0.3 per cent in 2013," the IMF said in the findings of a regular mission. In April, the IMF still forecast economic growth this year of 0.6 per cent. Germany's economy ministry forecasts growth of 0.5 per cent.

The announcement came just hours after European Central Bank president Mario Draghi said the euro zone economy was on track for a recovery later this year.

IMF mission chief to Germany Subir Lall said the fund may also cut its 2014 forecast from a current 1.5 per cent, given lower growth this year.

“A gradual pick-up in activity projected towards the end of the year is conditional on a further and tangible reduction in this uncertainty and an . . . expected gradual recovery in the rest of the euro zone,“ the IMF said in a statement.

ECB chief
In a speech prepared for the International Monetary Conference in Shanghai, Mr Draghi conceded: "The economic situation in the euro area remains challenging."

But he added that there were “a few signs of a possible stabilisation, and our baseline scenario continues to be one of a very gradual recovery starting in the latter part of this year”.

The ECB cut interest rates to a new record low in May and said it would act again if necessary but its hand may in part be stayed at a meeting on Thursday and going forward by a rebound in inflation, which rose back to 1.4 per cent in May from 1.2 per cent in April.

Figures for activity in the manufacturing sector yesterday showed an improvement in all euro zone countries, but still no growth.

Also yesterday, the IMF said Spanish and euro zone authorities must do more to strengthen the country’s financial system and pressed for “rigorous“ steps to ensure banks can cope with losses on loans.