Advisers say crisis has pushed state to brink of recession

GERMANY:THE GLOBAL financial crisis has brought Germany to the "brink of recession" with growth of just 0.2 per cent next year, according to the country's four leading economic institutes, writes Derek Scallyin Berlin.

These economic "wise men", who advise the government, have stuck to their forecast of 1.8 per cent growth this year and predict a turnaround next year if Monday's €500 billion bank guarantee has the desired effect.

By their calculations, yet to be confirmed by the government, Europe's largest economy shrank in the second quarter. Another contraction in the third quarter would qualify the economy for the technical definition of recession.

After growth of 1.4 per cent in the spring, finance minister Peer Steinbrück admitted that clouds are now gathering over the German economy. "Naturally the signs are there," he said. "It's certainly not doom-mongering."

The economic institutes said they were observing feelings in leading Germany companies normally only seen in recession.

"The insecurity of German companies stems from the scale and duration of the finance crisis on international finance markets," said their report, noting that it is impossible at the moment to quantify the full scale of market instability.

The recent financial fluctuations - including last week's 22 per cent plunge on the Frankfurt benchmark index - has pushed German investor confidence to near-record lows in October, according to the closely watched ZEW index.

"There's a concern (among investors) that it will spread to the real economy," said Sandra Schmit, an economist at ZEW.

Nevertheless banking stocks recovered further yesterday after the announcement of a €500 billion package of guarantees and capital injections.

After weeks of bad news, shares in German banks rallied yesterday in trading. Deutsche Bank, the country's largest bank by assets rose 15 per cent and there was a 29 per cent rally in shares of Hypo Real Estate, the subject of a €50 billion bailout last week.

Hypo's Dublin-based subsidiary Depfa suffered a downgrade on the debt rating of all its public sector asset-covered securities - the bank's public sector loans that have been packaged and sold on to investors.

Speculation was growing yesterday that it is Germany's publicly owned banks, and not private institutions, that will benefit the most from the rescue plan.

The ZEW was more sceptical than the economic wise men about the banking plan, saying it will "help banks but will not necessarily support economic growth".