Economic growth in Germany has slowed again during 1999.

However, there are first signs of a pick-up in economic activity. This could provide some crucial support to Europe's single currency, the euro, as Germany is the eurozone's largest economy.

Last year, Germany's gross domestic product (GDP) grew by only 1.4%, down from 2.2% a year before.

But the figures came as no surprise to the financial markets, and made hardly any impact on the Frankfurt stock market.

Growth prospects

Official statistics, though, suggest that the economy did much better during the fourth quarter of 1999, growing by 2%.

Government predictions of a strong recovery in 2000 could turn out to be correct after all.

One possible explanation for the improved fortunes of Germany's industry could be the weakness of the euro.

A slump in exports was the main reason for halting growth, but as the euro lost value, German exports picked up.

Budget boost

The government, meanwhile, can point to a surprise drop in its budget deficit-to-GDP ratio, an important indicator of fiscal discipline.

The Berlin government's deficit amounted to just 1.2% of gross domestic product, well below the 3% threshold required by the stability pact agreed by members of Europe's monetary union.

This will allow Chancellor Gerhard Schroeder to press on with his plans for sweeping tax and spending cuts.

Stefan Bergheim, economist with Merrill Lynch in Frankfurt, said Germany was now "entering a very positive scenario ... with declining taxes, declining unemployment and declining state spending".

Wage threat

However, there is trouble brewing on the country's economic horizon.

Germany's powerful IG Metall union, which covers the whole engineering sector, has now made an inflation-busting 5.5% wage demand.

This would be more than four times the country's current rate of inflation.

Less than a week ago, the European Central Bank warned it might have to raise interest rates if trade unions failed to show wage restraint and drove up inflation.

The pay dispute might not only scuttle the chances of economic recovery and undermine the ECB's monetary policy.

It could also torpedo an accord between Germany's unions and employers to create jobs in exchange for modest pay rises and a lower retirement age.

This Buendnis fuer Arbeit, or alliance to create jobs, brokered on Sunday by Chancellor Schroeder, now looks increasingly fragile.

Business leaders have reacted angrily to the union's pay demands. Werner Stumpfe, president of the engineering employers group Gesamtmetall, accused the union of putting obstacles in the agreement's way.