THE growth rate of the German economy should pick up again next year, but the Ifo economics institute is forecasting a modest 2 per cent rise after only 0.75 per cent growth this year.

In its latest monthly report, the institute said that sustained growth would continue to be heavily dependent on exports as consumer spending and construction remained sluggish.

It warned that high unemployment would persist as industry continued to rationalise in a bid to cut costs and increase competitiveness.

The report, in line with recent government estimates showing signs of recovery, estimated that growth in the second quarter would more than make up for the seasonally adjusted 0.5 per cent fall in the first quarter.

The main source of strength in the economy continues to be exports, despite slow economic growth throughout the European Union and frequent complaints that high operating costs are hurting the international competitiveness of German industry. Ifo said German exports would grow a real 3.5 per cent this year compared with 1995 and surge to 5 per cent next year.

"German companies are targeting the fast growing economies, particularly the south east Asia markets and indeed eastern Europe," said Mr Holger Fahringkrug, chief economist at UBS in Frankfurt. "Much still depends on the strength of the deutschmark against the US dollar."