German Economy To Shrink 6 Percent In 2009

Germany's economy will shrink by 6 percent this year and continue to contract in 2010, with a loss of over 1 million jobs expected, economic research groups said.

BERLIN (AP) -- Germany's economy will shrink by 6 percent this year and continue to contract in 2010 as its key export sector is hit by the global economic crisis, leading German economic research groups predicted Thursday.

The organizations, including Munich's Ifo Institut and Kiel's Ifw, said the continuing slump would lead to a spike in unemployment as businesses struggle to keep afloat.

"Through 2009 we anticipate a loss of more than 1 million jobs... and in the fall total unemployment will be over the 4 million mark," the think tanks said in a statement. "For 2010 the institutes expect no drastic rebound. GDP should sink 0.5 percent and by the year's end we anticipate just under 5 million unemployed."

The dour prediction comes a day after the International Monetary Fund forecast that the German economy, Europe's largest, would contract by 5.6 percent this year as its export-dependent industry continues to suffer from weaker demand around the world. The IMF had predicted only a 2.5 percent decline in January.

Meanwhile, German Economy Minister Karl-Theodor zu Guttenberg said Wednesday that the government expects a contraction of more than 5 percent in 2009, but did not give a specific figure. The government had predicted a 2.25 percent decline in January, and is due to give its official revised figure next week.

"The joint forecast of the institutes paints a very dark picture of German economic prospects in the foreseeable future," said IHS Global Insight analyst Timo Klein in a research note. "However, just as German growth has plunged since October 2008 as a result of the close linkage with international demand developments via its exports, it may recover more rapidly and/or to a greater extent in 2010 than currently predicted if global demand recovers."

Klein said his organization was sticking with its April forecast of a 4.8 percent drop in German GDP drop in 2009 and a 0.2 percent drop in 2010.

"The structural improvements that have been seen in the German economy in recent years will only have a beneficial effect if global demand recovers, and this in turn hinges critically on a return of trust in the financial sector worldwide," he said.

The German think tanks said the worst problem facing the global economy was financial market turmoil and uncertainty in the banking systems.

They suggested their forecasts for Germany's economy could become even worse if the banking sector deteriorated significantly. On the other hand, they said the prognosis could turn out better -- and the unemployment less severe -- if credit markets eased.

"Economic policy must make it a priority to restore the full functionality of the banking sector," the institutes said.

The German government has put together two stimulus packages worth some euro80 billion ($104 billion), featuring programs such as infrastructure spending and a popular car-scrapping bonus.

The institutes agreed, however, with comments from Guttenberg on Wednesday that there is currently no need for a third stimulus package, saying other options should first be explored.

"A more expansive fiscal policy is in the view of the institutes only justifiable under certain conditions," they said.

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