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Friday, 22 June, 2001, 16:19 GMT 17:19 UK
Bleak outlook for Germany
German economy
Germany's manufacturing sector may already be in recession
by BBC Europe business correspondent Patrick Bartlett

German business confidence slumped to a two year low on Friday, suggesting Germany is now feeling the full force of the US-led global economic slowdown.

The sharp fall in the respected IFO business index has heightened fears that some sectors of German industry may even be heading for recession.

The survey by the Munich-based economic institutue follows a series of gloomy announcements this week.

On Thursday, the German chemicals group, BASF, blamed substantially lower growth for its decision to close 10 plants worldwide. The firm said it could not give details of the sites affected because employees had not yet been informed.

Separately, the struggling carmaker Opel predicted falling car sales in Germany this year, and warned of further job losses at its German plants.

German job centre
Unemployment rising
On Wednesday the Munich-based chipmaker, Infineon, pitched in with a shock warning to investors about expected losses.

Bleak forecasts

Confirming the bleak picture, several leading German think-tanks lowered their growth forecasts for this year to well below the government's 2% forecast.

Some economists believe Germany's manufacturing sector may already be in recession.

Gernot Nerb, in charge of the IFO's business surveys, predicted the slowdown had further to run.

"According to our figures, over the next two or three months it doesn't look that we'll reach the bottom," he said.

The IFO has joined several other German research institutes in calling for a Eurozone interest rate cut to boost growth.

ECB should "fulfill its duty"

According to our figures, over the next two or three months it doesn't look that we'll reach the bottom

Gernot Nerb
Director Ifo
The German government's response has been to turn its fire on the forecasters, accusing them of talking the economy down.

At the same, it's clear that ministers are frustrated at the European Central Bank's reluctance to cut rates. While avoiding direct comment, the German finance minister, Hans Eichel, recently called on the Bank to "fulfill its duty".

But the ECB believes it has little room for manoeuvre.

Inflation in the 12 nation eurozone has climbed to its highest rate since the single currency's launch. In Germany itself, inflation - driven by higher energy and food prices - is now around 3.5%, an eight-year peak.

That poisonous cocktail of slowing growth, and high inflation, is being felt in the jobs market.

The number of unemployed has started rising again after falling below four million last year. The German Chancellor's promise to cut the figure to below 3.5 million by election-time next autumn is looking increasingly difficult to fulfill.

Industry groups and ppposition parties say Germany is now paying the price for the govenrment's failure to reform the labour market.

The high cost of employing workers, plus acute skills shortages in some sectors, they say, have made Germany more vulnerable to the global slowdown.

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22 Jun 01 | Business
German business confidence slumps
22 Jun 01 | Business
Euro warning signs
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