Deep recession for Germany

BERLIN - THE German economy is set to suffer its deepest recession since World War II, with growth in Europe's biggest economy to slump by as much as 2.5 per cent this year, Economy Minister Michael Glos said on Friday.

'This year, economic output is expected to fall by between two and 2.5 per cent,' Mr Glos said in an interview with Welt am Sonntag released on Friday and set to be published in full on Sunday.

Germany entered a recession in the third quarter with two successive three-month periods of shrinking economic output.

Preliminary official figures on Wednesday showed that the slowdown accelerated sharply in the final part of the year, contracting by between 1.5 and two per cent - the sharpest fall in two decades.

The new figures represent a huge downward revision to Berlin's previous estimate of small, but postive, growth this year of 0.2 per cent.

The world's largest exporter has been hit hard by a slump in global demand as the world economy nosedives amid the worst financial crisis since the 1930s.

In a bid to stave off the slowdown, Chancellor Angela Merkel's 'grand coalition' government this week agreed a stimulus package worth 50 billion euros (S$98.3 billion) to give the economy a much-needed shot in the arm.

The main thrust of the new package is a huge increase in spending on roads, railways, hospitals and schools.

Other elements include cuts in tax and social security contributions, as well as incentives for consumers to buy new 'greener' cars to boost Germany's ailing auto sector.

Ms Merkel also plans to set up a 100-billion-euro fund to help out firms struggling to secure sufficient credit - or at least loans without painful interest rates - from hard-up banks still reluctant to dole out cash despite Berlin's 480-billion-euro banking package rushed through last year.

But her efforts will also lead to a huge increase in Germany's public deficit to the point that it is set to breach EU rules in 2010, Finance Minister Peer Steinbrueck told the Financial Times Deutschland this week.

Recent data have made it clear that Europe's biggest economy is going south, with industrial orders and output falling off a cliff and unemployment on the rise in December for the first time in 33 months to stand at over three million.

Figures from the German industrial federation on Wednesday showed foreign orders slumping almost 30 per cent in November. Deutsche Bank, meanwhile, the country's biggest bank, unveiled a loss of almost five billion euros for the fourth quarter.

Commerzbank, the second largest lender, is set to be part nationalised with Berlin taking a 25 per cent plus one share stake in return for 10 billion euro in desperately needed fresh capital.

And the government could buy one third or more of troubled property lender Hypo Real Estate (HRE), Germany's biggest credit crunch casualty, a lawmaker from Merkel's CDU party told AFP on Friday.

A total of 50 billion euros in cash and another 30 billion euros in loan guarantees already provided to HRE have not been enough to get its back on its feet. -- AFP


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