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Europe's biggest economy Germany will grow 0.1 percent in the first quarter of 2012 on the back of a strong labour market, avoiding a feared recession, but its annual expansion will be sharply down from last year, the government predicted on Wednesday.

Many economists have forecast Germany would experience a modest recession at the start of this year with a second successive quarter of decline after an official from the statistics office recently said the economy had contracted by about 0.25 percent in the last quarter of 2011.

The economy ministry cut its annual growth forecast on Wednesday to 0.7 percent from a previous 1 percent and against an impressive 3 percent for the whole of 2011.

It also acknowledged a dip in momentum in the winter months, but said growth would steadily revive through the year and in 2013 should hit 1.6 percent.

Economy Minister Philipp Roesler said the forecasts assumed no deterioration in the euro zone debt crisis, an oil price of $109 per barrel, and that the European Central Bank would hold rates at 1 percent.

“Germany is and remains the anchor for stability and growth in Europe,” Roesler told a news conference called to present the forecasts.

“There can be absolutely no talk of a recession in Germany.”

But Berlin does expect the woes of its euro zone peers to have a significant impact on its economic performance.

The contribution to German economic growth from foreign trade, the traditional backbone of its economy, will decline by 0.3 percent this year after making a positive contribution of 0.8 percent in 2011.

The ministry expects exports to grow by 2.0 percent this year and imports to climb by 3.0 percent.

Having branded itself “world champion” in exports for many years, Germany will rely on domestic demand for growth in 2012, especially private consumption.

“Due to the difficult environment abroad we expect a temporary dent in growth in the winter half. But we are firmly convinced that the German economy will return to higher growth in the course of the year,” said Roesler.

The ministry predicted unemployment would fall to 6.8 percent this year and ease further to 6.7 percent next year.

Germany has shown more resilience to troubles elsewhere in the euro zone, after fiscal prudence, steady demand for its high-quality products and high competitiveness helped it weather a tough global environment.

Robust economic growth enabled it to more than halve its initial planned new borrowing in 2011 and take the moral high ground in urging ailing euro zone peers to save and consolidate, after busting euro zone deficit rules itself in 2010. - Reuters