Germany slashes growth forecast

The German economy is shrinking rapidly

The German government says the country's economy will shrink 6% this year, in a dramatic revision to its earlier forecast of a 2.25% decline.

It would be by far the worst post-war performance of the German economy, as the biggest previous decline was 0.8% in 1993, just after re-unification.

The government is sticking to its forecast of a mild recovery in 2010, although independent analysts disagree.

Germany has been hit by the collapse of demand for its global exports.

Eurozone impact

Last week, Germany's eight leading economic think tanks said that the German economy would shrink by 6% this year, and continue to contract in 2010, with unemployment reaching 10%.

The gloomy forecast chimes with that of the IMF, which shows the German economy contracting by 5.6% this year, a faster decline than any other major economy apart from Japan.

Germany is the world's largest exporter, and the biggest economy in Europe, so its decline is weighing heavily on the economic prospects of other eurozone members.

In its forecast, the German government said that exports would shrink by 18.8% this year.

But the German economy minister said that conditions would improve later in the year, citing recent business confidence surveys.

"These are all signs for a possible bottoming out," said Karl-Theodor zu Guttenberg.

Corporate problems

The growing problems for the German economy have been reflected in sharp falls in profits for some of its leading companies.

On Wednesday, the leading German chemical manufacturer, Bayer, said its first quarter profits fell 44% as the global economic crisis cut sharply into demand.

And tyre and auto parts makers Continental reported a loss of 267m euros ($352m; £239m) in the first quarter as slumping demand for cars pushed its sales sharply lower.

Earlier in the week, leading car manufacturer Daimler reported a 1.3bn euro loss for the first quarter of the year.

Looming election

The gloomy economic forecast adds to pressure on the coalition government led by Angela Merkel to put in place another economic stimulus package before Federal elections in September.

Former finance minister Oskar Lafontaine, leader of the opposition Left Party, said it was a "sad indictment" of Mrs Merkel's government and asked: "When will the government finally get out of their seats and step into the ring?"

But with the recession cutting government tax revenues and increasing the budget deficit, the German government has little room for manoeuvre.

Mr Guttenberg rejected calls for another stimulus, saying that it would "achieve the opposite of what was intended" by adding to the uncertainty for investors, consumers and taxpayers.