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Last Updated: Tuesday, 1 July, 2003, 13:13 GMT 14:13 UK
Germany 'heading for recession'
Hamburg, Germany
Germans are less happy to spend
Germany may be slipping into recession despite government intervention to stimulate growth, according to a German think tank, DIW.

"Germany is in an economic crisis," the research institute said in its summer report which cut its forecast for German growth to -0.1% from a previous 0.6% rise.

The warning comes after Chancellor Gerhard Schroeder announced tax cuts in an attempt to boost consumer spending.

Figures released on Tuesday show German retail sales fell in May.

Optimistic forecasts

"The numbers are disappointing but not entirely surprising.

"Unemployment and income developments are still having a negative effect on spending," economist at Sal. Oppenheim in Cologne Ulrike Kastens told Reuters.

Even German Finance Minister Hans Eichel has admitted that question marks hang over the government's official 2003 growth forecast.

Gerhard Schroeder

In order for targets to be reached, growth must reach the official forecast of 0.75% - which some say is optimistic for a stagnant economy - and federal states must rein in their budget and cut tax subsidies.

Mr Eichel has said Germany is likely to breach the EU limit this year which will mean it could face fines, despite earlier government promises to the contrary.

European Union rules limit the deficit to 3% of GDP but last year, Germany's deficit reached 3.6% of GDP.

The European Union monetary chief Pedro Solbes welcomed tax cuts made at the weekend but said structural reform must remain a priority.

"The implementation of structural reforms is the decisive point. If that doesn't happen, Germany will not progress," he said.

The government says tax cuts would be funded by subsidy reductions, new borrowing and possibly by the sale of some government-held assets.

The BBC's Tristana Moore
"Berlin is bankrupt"

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