GERMAN BUSINESS confidence has plunged to a 16-year low as the financial crisis begins to bite, signalling a long, hard winter to come.

Munich's Ifo economic institute said yesterday that its closely watched index, a survey of 7,000 managers, had dropped more than four points to 85.8 in November.

Data released yesterday showed the greatest month-on-month fall since the September 11th attacks in the US in 2001, indicating that German managers have been hit by a gloom not seen since the post-unification slowdown 18 years ago. "All in all, the economic downturn has increased and will now hit the employment market," said Ifo president Hans-Werner Sinn.

A separate survey revealed yesterday that every third company in Germany is planning redundancies. A closer look at the Ifo index revealed particularly bad news in wholesale and retail sectors, as well as grim news from the manufacturing sector, prompted by a rapid drop in demand in Germany's all-important export sector.

The current pessimism however is nothing compared to the future gloom: the index of German manager expectations for the coming six months has dropped almost four points from last month to 77.6. In Cologne, the German Economic Institute dashed hopes of a quick turnaround, forecasting a recession for the coming year.

Of the 1,800 companies it questioned, some 37 per cent are bracing themselves for a drop in production and 35 per cent say they can only survive by firing staff.

"The situation is serious but there is no reason for panic," the institute said in a statement. "It is a picture of recession but one we can deal with." After falling to an eight-year low, unemployment is expected to rise next year once more by 190,000 to 3.5 million, according to the institute.

Institute director Michael Hüther has joined a growing chorus of German economists and politicians calling for widespread tax cuts to counter the slowdown.

German chancellor Angela Merkel has resisted any across-the-board tax breaks but has given her tacit approval to a €130 billion EU stimulus programme.

The only condition: that it does not cost Berlin anything above and beyond the limited programme agreed earlier this month, at a cost of 0.5 per cent of gross domestic product over the next two years.

The German leader has already given up plans to present a balanced budget by 2011 but now faces pressure to introduce snap tax cuts from conservative colleagues in her own party and its sister organisation, Bavaria's Christian Social Union.