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Germany

Expert: German Economy Could Shrink by Over Five Percent

Germany's Deutsche Bank warned on Monday the country's economy could contract by more than five percent this year as Europe's largest economy sinks into its worst recession in decades.

A Volkswagen plant in Dresden, Germany

Volkswagen became the latest company to say it's reducing working hours

In an interview with the Bild newspaper on Monday, Feb. 23, Deutsche Bank's Chief Economist Norbert Walter said Germany had to be prepared for a dramatic decline in economic output as the global downturn batters exports, decimates companies' profits and raises the specter of large-scale job losses.

Walter said a five-percent contraction is actually a fairly optimistic forecast, all things considered.

"The German economy will shrink by five percent in 2009 only if we have a real upswing in the summer," Walter told the paper. "It cannot be ruled out that this upswing will not come. Therefore, a worse result than this (five-percent contraction) can no longer be excluded," he said.

His comments came as Germany's main stock index, the DAX, slipped to 3,936.45 at closing time in Frankfurt on Monday, the first time in four years that it has closed lower than 4,000.

Since the beginning of the year, the top 30 German shares have lost an average 16 percent of their value.

Experts predict jump in joblessness

A broker on the floor of the Frankfurt stock exchange

The DAX on Monday slipped to its lowest point in four years

Walter's prognosis is much worse than the German government's own forecast that the economy will contract by between two and two-and-a-half percent this year.

Data released earlier this month showed that the German economy shrank by 2.1 percent in the final quarter of 2008, the biggest slump in 20 years.

Germany officially entered recession in the third quarter of 2008 after two successive three-month periods of negative growth.

Walter's gloomy forecast was echoed by Thomas Straubhaar, head of the Hamburg Institute of International Economics.

"We, too, expect a contraction of over three percent in our next prognosis," Straubhaar told German public broadcaster MDR, adding that he expected unemployment in Germany to rise to four million this year and inflation to jump sharply by 2010.

"This is the price we'll pay for the fact that we're now trying in the short-term to prevent the world from lurching from a recession to a depression," he said.

A poll of top economists published Monday by the Financial Times Deutschland predicted that 800,000 more people could be out of work by the end of next year.

German Chancellor Angela Merkel's government this month passed the second of two economic stimulus packages designed to lift the economy out its slump by pumping public money into infrastructure projects and reducing taxes.

But the government remains under pressure to prop up tottering banks and inject aid into faltering companies in a bid to stave off large-scale layoffs.

Volkswagen became the latest carmaker to announce that around two-thirds of its 92,000 employees will have their working hours reduced this week as new car production continues to slide.

Author: Sonia Phalnikar (ap/afp)

Editor: Kyle James

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