BERLIN (Reuters) - Leading economic institutes halved their 2013 German growth forecast on Thursday, citing a sharp downturn in industrial production during the winter, but said Europe's largest economy would gain momentum next year thanks to domestic demand.

The institutes, whose analysis flows into the government's own economic forecasts, cut their forecast for 2013 to 0.4 percent, which would be a slowdown compared with 0.7 percent growth last year.

They said the economy would expand more than four times as strongly in 2014, projecting growth of 1.8 percent, revising their April estimate for 1.9 percent growth down a notch.

"The German economy is on the cusp of an upturn which will be driven by domestic demand," they said in a statement.

They said investment would gradually pick up over the rest of this year and 2014 as the global economy revives and uncertainty about the euro zone crisis wanes but said it would not be dynamic at first given that capacity was still underused.

"Firms' sales prospects at home and abroad will continue to brighten and then higher capacity utilisation will probably lead to more investment in expansion," the institutes said, adding that favourable financing conditions would support this.

They said investment in capital equipment, which rose between April and June after falling for six consecutive quarters, would pick up next year after dropping this year.

Companies will boost spending on machines and facilities by 7 percent in 2014 but that will still not be enough to push their investment back up to its pre-crisis level in 2008.

Private consumption, on which the government is relying to prop up growth given the weakness of exports, will increase by 0.9 percent this year and by 1.4 percent next year, the institutes estimate.

Positive signs for household spending include decent wage hikes, moderate inflation and a projected rise in the number of people in work to a record high of 41.8 million this year and 42.1 million next year, the institutes estimate.

While exports will increase modestly thanks to stronger global growth, imports will get a big boost from domestic demand, meaning that foreign trade will probably drag on growth, they added.

The economy ministry is due to update its growth forecasts on October 23. It currently predicts the German economy will expand by 0.5 percent this year and by 1.6 percent next year.

(Reporting by Michelle Martin; additional reporting by Klaus Lauer; Editing by Noah Barkin)