Germany's economy is poised to shrink by a record six percent this year, a group of top economic institutes said Thursday, the latest in a series of dire predictions for Europe's largest economy. As the economy nosedives, jobless lines are set to grow, the institutes added, with more than one million jobs lost this year - a statistic sure to be on Chancellor Angela Merkel's mind five months before a general election.
Nor is the world's top exporter likely to see an improvement any time soon. The institutes predicted that the recession would continue into 2010, with the economy contracting by 0.5 percent next year and unemployment rising to just below five million.
"On the basis of leading indicators, the institutes expect that the downward trend will continue and do not believe there will be a stabilisation before the middle of 2010," the widely-watched report said. "The German economy... is in the deepest recession since the founding of the Federal Republic of Germany" in 1949, they added.
The institutes publish their outlook twice a year, generally just before the government updates its own forecasts. Berlin is set to release its own view of the economy on April 29 and is certain to revise down its current projection of minus 2.25 percent for 2009.
Finance Minister Peer Steinbrueck said Wednesday the economy was set to shrink by at least five percent this year with output collapsing by 3.3 percent in the first quarter. The International Monetary Fund also released a downbeat assessment of Germany's economic performance Wednesday, saying it would suffer the worst recession of all advanced economies except for Japan.
The institutes - Ifo in Munich, IfW in Kiel, RWI in Essen and IWH in Halle, together with the Austrian think-tanks, WIFO and IHS and the Swiss KOF - called on the European Central Bank to slash borrowing costs to stave off the worst effects of the recession. "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 percent," the report said. The ECB's rate currently stands at 1.25 percent and senior officials at the bank - including Germany's Bundesbank President Axel Weber - have said the rate should not dip below one percent.
However, the experts cautioned against a third German stimulus package as a shot in the arm for the economy, following two previous attempts worth a combined 80 billion euros (104 billion dollars). "Given the conditions we are under, we should let the first two take effect before we consider a third package," Kai Carstensen from the IFO institute told reporters.
Responding to the report, Economy Minister Karl-Theodor zu Guttenberg said there were "still reasons to hope for an improvement" given the effect of the various stimulus packages implemented around the world. For their part, the experts said there should be a small pick-up in the third quarter of this year as government measures kick in and partly as a reaction to the slump in previous quarters.