Germany raises growth forecast, economy minister calls for more spending

By Michael Nienaber and Joseph Nasr

BERLIN (Reuters) - The German economy will grow slightly faster than expected this year due to state spending on migrants and soaring private consumption, the Economy Minister said on Friday, and he called for more public investment in schools and roads.

Sigmar Gabriel also warned Chancellor Angela Merkel's conservatives against limiting the state's spending ability by promising "gigantic tax cuts" ahead of next year's election.

"The level of investment is always a yardstick for how firmly a country believes in its future and how it is willing to tackle this," said Gabriel, head of the Social Democrats, junior partner in Merkel's coalition government.

"It's clear that we need significantly more investment in education and schools," he said, adding that more roads needed to be modernised and Internet connections had to become faster.

The government lifted its 2016 growth forecast for Europe's biggest economy to 1.8 percent from 1.7 percent previously, which would be the strongest growth in half a decade.

Germany's solid public finances are mainly due to the European Central Bank's ultra-low interest rates, which help the national budget to the tune of some 20 billion euros per year, Gabriel said. But he added: "Interest rates can rise again."

Therefore it would not be smart for the government to lower taxes only to find itself forced to raise revenue somewhere else sooner or later, he said.

Merkel's Christian Democratic Union (CDU) have made tax cuts of up to 15 billion euros a cornerstone of their election campaign less than one year before the next federal vote. Gabriel's Social Democrats have made boosting investment their platform.

SOLID UPSWING

The government revised down its estimate for next year, however, predicting an expansion of 1.4 percent instead of 1.5 percent. But adjusted for the number of work days, the economic slowdown is expected to be less severe with a predicted growth rate of 1.6 percent in 2017.

For 2018, the government expects growth to pick up again to 1.6 percent.

"The upswing in the German economy is solid," Gabriel said, adding that companies were holding their ground especially against the backdrop of sluggish global demand.

"The world economy is not running smoothly," Gabriel said, adding that Britain's decision to leave the European Union has had a limited impact on the economy but it would be felt harder in the medium term.

He said household spending remained the most important growth driver, also helped by the government's decision to introduce a national minimum wage last year and to increase pension entitlements by the most in more than two decades this year.

The government expects the number of people in employment to hit a record of 43.6 million this year and 44 million in 2017. That should further propel domestic demand and push up tax revenue, enabling the government to increase state spending or reduce levies.

At the same time, Berlin expects the number of unemployed to drop further to 2.69 million this year and 2.66 million next. "This is remarkable given the recent migration flows into the country," Gabriel said.

Germany took in more than 1 million migrants this year and last, mainly from war-torn countries such as Syria, Iraq and Afghanistan. The government and federal states are spending more than 20 billion euros this year to accommodate and integrate the new arrivals.

(Editing by Hugh Lawson)