The German economy will shrink 2 per cent next year, the biggest annual contraction since World War II,
the Essen-based RWI economic institute said.
The RWI, which helps prepare twice-yearly economic reports for the government, lowered its outlook today from a prediction of 0.7 per cent economic growth made in September.
Employment and tax revenue in Europe's biggest economy will decline, the institute said in an e-mailed statement. The financial market crisis is having a much stronger effect on the global economy than was conceivable earlier, the RWI said in a statement.
The institute said it was within the government's powers to limit the downswing next year and bring the German economy back to expansion faster by lowering income tax rates.
Companies are grappling with a slowdown in the economies of their main trading partners as the global financial crisis erodes demand. Ms Merkel has so far resisted backing tax cuts, arguing that the goal of a balanced budget must not be abandoned. Consumer spending may be "stable" at least until the middle of next year, helped by a drop in the country's inflation rate to 0.9 per cent on average in 2009, the RWI said.
A reduction in income tax rates that would give €25 billion, or 1 per cent of gross domestic product, back to tax payers would boost growth by 0.7 percentage points, it said.
Bloomberg