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Germany predicting economy could contract by 1pc in 2009

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German Finance Minister Peer Steinbrueck addresses the German lower house of parliament Bundestag in Berlin yesterday

German Finance Minister Peer Steinbrueck addresses the German lower house of parliament Bundestag in Berlin yesterday

German Finance Minister Peer Steinbrueck addresses the German lower house of parliament Bundestag in Berlin yesterday

GERMAN Finance Minister Peer Steinbrueck says Europe's biggest economy could contract by up to 1pc in 2009 in what economists say would be the biggest decline since World War II.

But there were indications that the European Central Bank (ECB) might be cautious about how much it cuts interest rates if, as expected, it eases monetary policy again next month.

Markets have been looking for rates to be slashed by at least three-quarters of a point, but there were a number of ECB warnings yesterday about the dangers of cutting too fast.

Executive Board member Lorenzo Bini Smaghi said "sharp" interest rate cuts may hurt market confidence.

"It may contribute to, rather than obviate, a worsening of market sentiment if it is interpreted as a signal that the central bank has a more pessimistic assessment of the economy than market participants," Mr Bini Smaghi said at a conference in Venice.

Governing Council member Ewald Nowotny said the ECB wants to keep some interest rate ammunition in reserve. He told news agency Bloomberg that nobody knew how the very difficult economic situation would develop.

"It makes sense to be rather cautious and keep some of the firepower, and that means of course that you cannot use it up all in one go," he was quoted as saying.

He said he expected the ECB to keep to its current pace in cutting rates, although the discussion at the ECB's next meeting on December 4 would decide the size of future moves.

The comments bolster those expectations that the ECB will cut rates by another half point to 2.75pc, rather than opt for a more aggressive move.

The ECB has cut rates by one percentage point in two steps since early October, but other central banks have taken more drastic action.

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Mr Steinbrueck told parliament that his forecasts for the German economy were for growth of between +0.2pc and -1pc.

Recession

Berlin's current forecast for next year is for 0.2pc growth, but with Germany having already entered a technical recession in the third quarter of 2008, many economists have much bleaker forecasts.

Mr Steinbrueck agreed that the government went for optimism with the prediction, adding that "no-one could say how long the German recession is going to last".

Jamie Dannhauser of Lombard Street Research in London said details of German output in the third quarter confirmed the sharp contraction in industrial output and export demand.

"With orders for manufactured goods collapsing and business confidence at its lowest ebb for 15 years, the economy should remain in recession in the final quarter of the year.

"But amidst the gloom, household spending rose -- the best performance among all the major economies," he said.


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