Germany will grow by a meager 0.5 percent this year, the government said on Thursday, raising its forecast by just 0.1 percentage points as a lack of investment and weak exports continue to be a drag on Europe's largest economy.
The German Economy Ministry kept its 2014 forecast for solid growth of 1.6 percent and said it was upbeat as the global economy begins to regain traction and crisis-stricken euro zone states make progress with their reforms.
"There is every reason to look to the future with optimism. The German economy is picking up again and is successfully leaving an economic weak phase behind it," German Economy Minister Philipp Roesler said in a statement.
Europe's economic powerhouse lost momentum in late 2012 after putting in a strong performance during the first two years of the euro zone crisis. Growth slowed to 0.7 percent last year and the economy contracted by 0.6 percent in the fourth quarter as firms postponed investments and foreign trade weakened.
Economists polled by Reuters expect the German economy to avoid recession by growing around 0.3 percent in the first quarter, though a drop in business sentiment and a decline in private sector activity suggest it may be heading for another contraction in the second quarter.
The ministry said firms would spend 2.2 percent less in equipment this year than in 2012, revising down a January forecast for 1.3 percent less investment due to a sharp fall last year.
But it said investment activity was emerging from a trough, with a backlog easing, and would increase by some 3 percent on the year in the fourth quarter.
German growth will be driven by domestic demand this year and next, the ministry said, as shoppers benefit from a stable labor market and disposable income is expected to rise by 2.3 percent in 2013 and by 2.8 percent next year.
The ministry said Germany's unemployment rate would hold steady at a 20-year low of 6.8 percent this year before falling to 6.6 percent in 2014.
It said exports, which have traditionally been the driver of German economic growth, would rise by a muted 1.6 percent this year before surging by 5.0 percent in 2014.
Weakness in the euro zone, where Germany ships some 40 percent of its goods, and China, which had proved a strong alternative market until recently, have weighed on the German economy.
The finance ministry said earlier this week that the German economy had stabilized in the first quarter, though industry remained in a lull and private consumption had not picked up.
(Reporting by Michelle Martin, editing by Gareth Jones)