German Economy to Shrink in 2009: Bundesbank

Germany's Bundesbank slashed growth and inflation forecasts for the euro zone's biggest economy next year, with economic growth now expected to contract 0.8 percent after significantly cooling down this year due to the financial crisis.

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It said on Friday that Germany's economy is unlikely to pick up again until the expected global economic upturn in 2010. In its bi-annual forecasts, the German central bank cut its inflation outlook for next year by more than two-thirds to 0.8 percent from 3.0 percent seen at the last forecasts in June. Harmonised consumer price inflation could even fall below 0.5 percent in mid-2009, but should pick up again from the fourth quarter.

"Deflationary effects, as feared by some, are not likely as things currently stand," the central bank said. The Bundesbank's forecast for growth next year is broadly in line with other institutions.

The International Monetary Fund and the Organisation for Economic Cooperation and Development also expect a contraction of 0.8 percent. German Finance Minister Peer Steinbrueck has said the economy could contract by as much as one percent next year and economists at Deutsche Bank see a shrinkage of up to 4 percent.

"The outlook for the German economy has shown a marked deterioration since the beginning of the fourth quarter. A considerably decline in real economic activity may be expected for the winter half-year of 2008-2009," the Bundesbank said. "The German economy is unlikely to pick up again until the expected global economic upturn in 2010."

In June, the Bundesbank had forecast GDP growth next year at 1.4 percent and for this year at 2.3 percent, both in real terms. It now expects growth this year would slow down to 1.6 percent in real terms and 1.3 percent in workday-adjusted terms, and for next year, a contraction of 0.8 percent is seen on both measures.

The Bundesbank disclosed for the first time its outlook for 2010 GDP growth, at 1.2 percent on real terms and 1.1 percent on workday adjusted terms. Inflation is seen at 1.4 percent.

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