German economy is in bad health but experts are split on how bad

Germany's leading economic think-tanks are at loggerheads over whether Europe's largest economy is heading for recession.

The German Institute for Economic Research (DIW) published a report yesterday saying the economy was on the verge of recession after two consecutive quarters of negative growth, a claim rejected as scaremongering by two other institutions.

"We don't have a recession," said Mr Wolfgang Nierhaus, economic expert at Munich's Institute for Economic Research (Ifo).

Mr Joachim Scheide, economy analyst at the Institute for World Economics (IfW) agreed. "Recession is a tough word for the current economic situation," he said.

The row began when the DIW published a report yesterday saying that the German economy was likely to stagnate this quarter after shrinking by 0.2 per cent in real terms in the last quarter of 2002. The Ifo and IfW, however, point to the Bundesbank's announcement this week that the economy had grown by "a big fat zero" in first quarter as proof that a second quarter of negative growth, and therefore a technical recession, has been avoided.

"The technical definition of recession is arbitrary and distorting," said Mr Scheide of the IfW, although he admitted that if Germany avoided recession it would be a close call. He predicts slight economic growth of 0.2 per cent in the first quarter.

Meanwhile, Finance Minister Mr Hans Eichel said he was unsure whether he would manage to bring German borrowing within euro-zone guidelines this year.

Mr Eichel said on Tuesday that "a recession is unlikely", although the possible war against Iraq had left noticeable "skid-marks" on the economy and had "significantly cooled down" business confidence.

A recession could play havoc with Mr Eichel's attempts to bring the public debt under the deficit ceiling imposed by the European Commission. Germany breached the 3 per cent of gross domestic product rule last year and is at risk of doing so a second time.

Mr Eichel has pledged to bring things under control this year or risk a fine from Brussels. But with rising unemployment and the danger of recession, he is ruling nothing out.

"If the economy grows by 1 per cent this year we hope to be able to stick to the crucial deficit ceiling of 3 per cent," said Mr Eichel in a magazine interview. "If the economy sinks further into the cellar, however, we will not manage that."