The German economy will contract by 2.25 percent this year, sinking into its deepest recession since World War Two as its export sector suffers from a collapse in foreign demand, the government said on Wednesday. Economy Minister Michael Glos said he expected the weakness in the broader world economy to be overcome by 2010.
He described the European Central Bank's interest rates as "very low" but he expressed concern about widening bond yield spreads between German and other European issues. "It is surprising and at the same time worrying that other European countries have to pay much more for their bonds," Glos told a news conference.
"The ECB (rates) are at 2.0 percent, that is very low and I am not sure if that is the end of the line," Glos said. The government's forecast for a contraction of 2.25 percent represented a marked downward revision from a projection it made last October for 0.2 percent growth, highlighting just how quickly the outlook for Europe's largest economy has darkened.
Since World War Two, the economy has not contracted by more than 1 percent in a year. "This year, the German economy faces its biggest challenge since reunification," the government said in its annual economic report, which was approved by the cabinet earlier on Wednesday.
Exports would drop by 8.9 percent and imports would fall by 5.0 percent, meaning foreign trade would make a negative contribution to gross domestic product (GDP) this year of 2.2 percentage points, the government forecast. By contrast, the government expected private consumption to rise by 0.8 percent, boosted by twin economic stimulus packages that it says are worth a combined 81 billion euros ($105.1 billion).