Germany slashes growth forecast

German Chancellor Angela Merkel's government slashed its growth forecast for Europe's biggest economy next year, saying that gross domestic product will barely expand as global markets for exports dry up.

The government cut its 2009 outlook to 0.2% from a forecast of 1.2% made in April. The DIHK chambers of trade and industry representing more than 3 million companies released their own estimate for economic growth of 0.5%. This year the economy will grow 1.7%, according to the government and ''just below 2%'' in the DIHK's view.

''We're seeing the first brake marks in the economy, even when you don't take into account what's happening in financial markets,'' Economy Minister Michael Glos told reporters in Berlin. ''Unlike in past years, to a certain degree foreign trade will fail to be an engine of growth.''

Germany's benchmark DAX share index dropped 22% last week, the most on record, as concern grew that bank failures and a credit-market freeze will drag the world into recession. Germany, the world's biggest exporter, saw its economy shrink in the second quarter.

The government's outlook comes two days after Germany's leading economic institutes published their twice-yearly joint review in which they forecast growth will slow to 0.2% in 2009 from 1.8% this year.

Expectations 'Muted'

''There's no doubt, companies' expectations are clearly muted,'' Martin Wansleben, the DIHK's managing director, said in a statement, citing a survey of more than 25,000 companies in September and the beginning of October. ''The positive business situation that we had is suffering more and more knocks.''

The share of managers who said they expect business to improve fell to 18% from 23% in a survey published in June, the DIHK said. The proportion that sees business worsening rose to 27% from 17%.

The share of companies that said they expect exports to grow fell 5 percentage points to 31%, while the share of companies that see exports declining increased 7 points to 17%.

The German economy will see ''at least stagnation,'' Finance Minister Peer Steinbrueck said this evening in a speech on the social market economy in Berlin, noting a recession, defined as two consecutive quarters of shrinking GDP, is possible.

Deutz, the German maker of diesel engines for trucks and ships, on October 13 cut its full-year sales forecast for a second time this year, saying the financial crisis has hurt demand in the US and Europe and that growth in China is slowing. The International Monetary Fund said last week growth will be ''particularly weak'' in industrialized countries.

'Slower Pace'

''Global economic growth is advancing at a slower pace,'' Wansleben said. ''Export business can no longer offset weak consumer spending as well as it has in previous years.''

Germany will provide as much as 500 billion euros ($US673 billion) in loan guarantees and capital to bolster its banking system, the country's biggest government intervention since the Berlin Wall came down in 1989.

Glos said that a general credit shortage ''is nowhere to be seen.'' Against the background of a balanced overall budget, it is ''important to give the economy some room to breathe in this difficult situation'' and accept a widening federal deficit to cushion the economic slowdown, he said.

Economy Ministry

The Economy Ministry, which is in charge of the government forecast, said it is based on the assumption that the financial crisis will cause ``no further big disruptions'' in the economy and that the banking system will survive the crisis ''mostly unharmed.''

The forecasts are based on the expectation that the US dollar will trade at $US1.42 per euro on average through 2009, Glos said.

Companies' readiness to invest, while still above the long- term average, is slowing and hiring will come to a halt ''in the coming months,'' said Wansleben.

The share of companies planning to step up investment fell to 23% from 26% while the share of companies that plans to cut investment rose to 25% from 20%. The share of companies planning to add staff fell to 15% from 19%, while the share that seeks to shed labor rose to 18% from 13%.

Bloomberg