German Bundesbank Sees Deepest Recession in 16 Years

By Gabi Thesing and Christian Vits

Dec. 5 (Bloomberg) -- The German economy, Europe’s largest, will shrink the most in 16 years in 2009 as the global recession hits exports, the Bundesbank predicted.

The economy will contract 0.8 percent next year after expanding 1.6 percent in 2008, the Frankfurt-based central bank said in its semi-annual macroeconomic projections published today. That would be the worst economic performance since 1993, when the economy also slumped by 0.8 percent. Exports will decline 0.5 percent in 2009 after expanding 4.4 percent this year, the projections show.

Germany’s economy is already in a recession as the global financial crisis curbs demand and prompts companies to scale back production. The International Monetary Fund forecasts that advanced economies will contract simultaneously next year for the first time since World War II. Central banks around the world have cut interest rates in an attempt to limit the slump.

Germany’s economy is likely to shrink for a third successive quarter in the final three months of this year and “will therefore be going into next year from an already depressed level and with considerable existing strains in terms of general sentiment,” the Bundesbank said. “The German economy is not expected to pick up again until the projected global economic upturn in 2010.”

‘Massive Cooling’

The Bundesbank forecasts growth of 1.2 percent in 2010.

“A lower exchange rate, the sharp decline in the cost of oil and easing price pressures” are “positive factors for the economy as a whole,” it said. “To a large extent, however, this development reflects the massive cooling of the global economy.”

German business confidence slumped to the lowest level in almost 16 years in November as the global slowdown sapped demand for exports. Manufacturing orders tumbled 6.1 percent in October from the previous month, the government said today.

Germany’s unemployment rate will rise to 8.1 percent next year and 8.5 percent in 2010 from 7.8 percent this year, the Bundesbank forecast. Private consumption is seen growing just 0.1 percent in 2009 after contracting 0.4 percent this year.

“Negative confidence effects as well as gloomier sales prospects are likely to induce households and enterprises to be generally more cautious in their spending.”

Germany’s inflation rate may fall to less 0.5 percent in the middle of 2009 “or even become negative,” the bank said. Still, “deflationary effects, as feared by some, are not likely as things currently stand.”

Inflation in Germany peaked at 3.5 percent in July. It will average 0.8 percent next year and 1.4 percent in 2010, according to the Bundesbank.

The European Central Bank lowered its key rate by three- quarters of a percentage point to 2.5 percent yesterday to cushion the economic slowdown, the biggest cut in its 10-year history.

To contact the reporter on this story: Gabi Thesing in Frankfurt at gthesing@bloomberg.net