By Sarah Marsh
BERLIN, April 18 (Reuters) - Germany's leading economic institutes said on Thursday domestic demand would drive a 0.8 percent expansion in Europe's largest economy this year and that this would more than double to 1.9 percent in 2014 as exports picked up.
The institutes also said that while it may seem appropriate for the European Central Bank to cut interest rates, given weak regional growth, this would only serve to delay necessary restructuring in the banking sector.
'An upwards tendency re-emerged in the German economy in spring 2013,' the institutes said in their twice-yearly report, which flows into the German government's own economic forecasts.
The institutes said the downward revision to 2013 growth from the forecast of 1.0 percent made last October reflected the need for the economy to catch up this year after contracting in the fourth quarter of 2012. This statistical effect masked the true strength of German growth, they said.
Germany's economy, long resilient to the euro zone crisis, slowed in 2012 and output shrank by 0.6 percent in the final quarter. But economists expect it to avoid recession and to have returned to weak growth in the first three months of this year.
The institutes' forecast was still double that of Chancellor Angela Merkel's government, which sees the economy growing by 0.4 percent this year and 1.6 percent next year. A possible increase in the official forecasts could further boost support for Merkel's centre-right coalition in September's election.
The institutes said imports would rise faster than exports in traditionally export-driven Germany in 2013, which will come as positive news for European trading partners that are mired in recession and eager for growth impulses.
Foreign demand will strengthen in 2014 on the back of the trading partners' improving economies, the institutes said.
The domestic economy will remain 'decisive' in the upturn, as residential construction benefits from low interest rates and rises in income and a continual decrease in unemployment bolsters consumer spending, the institutes said.
THREATS TO GROWTH
The institutes said the unemployment rate would inch down to 6.7 percent this year and drop to 6.4 percent next year, in stark contrast to spiralling joblessness throughout much of the rest of the euro zone.
They criticised the opposition Social Democrats' proposal for a minimum wage of 8.5 percent, saying this would harm jobs.
'It is probably that the very high unemployment in France of nearly 11 percent is due to the size of the minimum wage there,' they said.
France's current minimum wage stands at 9.43 euros per hour.
The institutes said annual inflation would ease to 1.7 percent this year, in line with the ECB's target, picking up to just above that goal next year at 2 percent.
The institutes were critical of Merkel's government's claims of consolidating the budget.
They forecast the budget to throw up a surplus of 0.5 percent of gross domestic product next year after being nearly balanced in 2013, but said this was more due to favourable economic conditions such as low interest rates than policy.
'It is now time to re-adopt a longer-term approach to economic policy,' the institutes said. 'Although structural adjustment processes implemented in the crisis-afflicted countries have started to deal with institutional problems in the euro area, they are far from resolved.'
'The German public budget also faces massive long-term burdens related to demographic factors.'
The institutes said it was unclear whether an ECB rate cut would really stimulate regional growth. 'A lower re-financing rate would above all lead to delaying necessary structural adjustments,' they said.
'The structural problems in the banking sector should be resolved speedily through financial policy.'
The institutes said Europe should aim to ultimately move its future banking supervision authority to a separate institution from the ECB so as to keep a clear division between fiscal and monetary duties - a frequently-aired concern in Germany.
(Reporting By Sarah Marsh, editing by Gareth Jones) Keywords: GERMANY ECONOMY/INSTITUTES
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