Grim forecast for German economy

THE GERMAN economy will shrink by a record 6 per cent in 2009, leading economists said yesterday, as the global economic slowdown begins to bite in Europe’s largest economy.

In their spring forecast Germany five “economic wise men” said they saw no good news on the horizon this year or next.

“We expect that the downward trend will continue, and do not believe there will be a stabilisation before the middle of 2010,” they said in their report. “The German economy is in its deepest recession since the founding of the Federal Republic of Germany .”

The report said unemployment would continue to rise, with just under five million people expected to be out of work next year.

German finance minister Peer Steinbrück has already indicated that next week’s revised government economic forecast will show at least a 5 per cent contraction.

Adding to the gloom, the International Monetary Fund (IMF)says Germany will experience the worst recession of all developed economies bar Japan, contracting by 5.6 per cent this year.

Analyst Timo Klein of IHS Global Insight said in an investor note that the new reports “paint a very dark picture of German economic prospects in the foreseeable future”.

He pointed to the plunging demand for German products since last October as the source of the problem. Yet he said exports could be part of the solution.

“Germany may recover more rapidly or to a greater extent in 2010 than currently predicted if global demand recovers.”

The economic “wise men” urged the European Central Bank to cut the interest rate from the current 1.25 per cent.

“Given the depth of the economic slump and the low inflation in the euro area, the European Central Bank should lower its main interest rate to 0.5 per cent.”

They welcomed Germany’s two economic stimulus packages worth € 80 billion, including a popular car-scrappage scheme and spending on public infrastructure projects, but dismissed calls for a third package.

“Given the conditions we are under, we should let the first two take affect before we consider a third package,” said Dr Kai Carstensen from Munich’s Ifo institute.

Meanwhile the euro zone is seeing an easing in the decline in the manufacturing and service sectors, according to a new survey.

The area’s services and manufacturing sectors posted the best results in six months, according to Markit’s Eurozone Flash Services Purchasing Managers’ Index .