Germany on the edge of recession, economists warn

15th October 2008, Comments 0 comments

In their twice-yearly report released in Berlin, the eight institutes slashed their German growth forecast for next year to just 0.2 percent.

Berlin -- Germany's leading economic research institutes warned Tuesday that Europe's biggest economy was on the edge of a recession as the world financial crisis triggered a plunge in investor confidence in the country.

In their twice-yearly report released in Berlin, the eight institutes slashed their German growth forecast for next year to just 0.2 percent down from a previous projection of 1.4 percent.

"The German economy is on the edge of a recession," said Udo Ludwig of The Halle Institute for Economic Research, releasing the report showing that Germany, the world's leading export nation, facing a sharp fall in foreign demand as the world economy slows.

The release of the think tanks' latest report coincided with the publication of the key ZEW investor confidence index, which slumped more than forecast in October to minus 63.0 from minus 41.1 points in September.

Analysts had predicted that the index, which was drawn up by the Mannheim-based Center for European Economic Research, the ZEW index would fall to minus 51.1 points this month.

"The German economy is facing tough times," said Christoph Weil, an economist with Commerzbank. "A rapid (economic) recovery is unlikely."

Based on responses from 256 analysts and institutional investors, the ZEW survey was compiled against the backdrop of a wave of panic selling on share markets last week triggered by the world's biggest financial crisis since the 1930's Depression.

"The concerns of the financial market experts that the crisis on the financial markets might spill over to the real economy increased this month," said ZEW president Wolfgang Franz releasing the group's latest survey.

The release of the institutes' latest report and the ZEW survey came just 24 hours after Chancellor Angela Merkel's coalition joined other European governments in unveiling far-reaching bank rescue packages, which in turn helped to inject a new sense of optimism into global share markets.

By mid-morning trading Tuesday, the Frankfurt Stock Exchange's key DAX index was up more than 5.0 percent following the concerted action by governments around the world to shore up investor and business confidence.

Franz said, however, the German government's rescue package should help to stabilize the situation.

A separate survey undertaken by the ZEW on Monday, when the German government outlined its bank rescue measures, showed that the decline in economic expectations for Germany was less pronounced after details of the action plan emerged, the ZEW institute said.

Moreover, the economic institutes said in their report they are expecting the world economy to record a gradual pickup in growth as 2009 unfolds if the coordinated global moves aimed at shoring investor confidence help to stabilize world financial markets.

In the meantime, the think tanks expect Germany to post a 1.8 percent expansion rate this year but with growth tapering off in the final months in the wake of the economic uncertainty unleashed by the global credit crunch.

Commenting on Berlin's 500 billion euros (671 billion dollars) bank action plans, Udo said the institutes essentially agree with the direction.

However, the eight institutes said in their report they believe Germany is likely to be particularly badly hit by the global credit squeeze as investment in the nation is dependent on exports, the institutes said in their report.

The weaker growth outlook could result in job losses next year of about 350,000 in Germany next year, the institutes also warned. This would translate into a 7.5 percent unemployment rate in 2009.

The fall in oil prices from record high is also likely to help ease inflationary pressures in Germany with consumer prices in the nation edging down to 2.3 percent next year from 2.8 percent this year.

The institutes' report was drawn up by five think tanks from Germany, two from Austria and one from Switzerland.

Andrew McCathie /DPA/Expatica

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