Germany cuts 2003 economic growth forecast

Germany has cut its economic growth forecast for this year as a key business indicator showed that business confidence has fallen to its lowest level in 16 months, writes Derek Scally, in Berlin.

A government spokesman said that the euro zone's largest economy was likely to grow by 0.75 per cent this year, down from a 1 per cent forecast in January. It followed news of a drop in the closely-watched Ifo index from 88.1 to 86.6, an unexpected development for analysts who expected that the end of the war in Iraq would lead to the third consecutive monthly rise.

"There are still no signs of better days for German business sentiment," said Mr Hans-Werner Sinn, president of Munich's Ifo economic institute.

The Ifo index is compiled from surveys of 7,000 German managers, asking them to rate the outlook of orders and investment for the next six months.

Recent surveys showed the managers more optimistic in the short term than the medium term and yesterday's drop in the six-month outlook from 97.2 to 94.9, the lowest level in a year, showed a continuation of that trend.

"Now that the war is over, managers are a lot more sceptical about the hopes for a swift recovery," said Mr Gernot Nerb, the Ifo's chief economist, adding that a strong euro and fears about SARS were hitting confidence. "We can't see any improvement in the outlook, but rather a certain scepticism, particularly in companies' view of the development of the export market," he added.

The languishing German economy received a second setback yesterday when the government revised down by a quarter of 1 per cent its economic forecast for this year. The economy will grow by 0.75 per cent this year and by 2 per cent next year, still above the forecasts of independent economic experts at home and abroad.

The OECD predicted German economic growth of just 0.3 per cent last week.

The reduced economic growth forecasts and rising unemployment mean the already burdened finance minister, Mr Hans Eichel, faces the headache of having to reformulate his budget. He is under pressure to show that he has public spending under control, but officials in Brussels expect Germany's budget deficit this year to overshoot the 3 per cent ceiling designed to protect the euro for the second year running.

Chancellor Schröder said yesterday that he would not tolerate for much longer opposition from left-wingers in his own Social Democratic Party (SPD) to government plans to revive the economy.

"Major changes to the \ programme would remove the basis of my work and force me to draw certain conclusions," said Mr Schröder, in what was taken as a veiled resignation threat.

Proposals to cut dole payments, loosen hire-fire laws and increase the age of retirement by two years to 67 will be hotly debated at a special SPD conference on June 1st.