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Germany

German economy set to shrink dramatically this year, think tank says

As the economic gloom spreads in Germany, slumping exports - a pillar of the country's economy - have been dragging down growth, making reliable forecasts next to impossible.

The German flag with a downward trend line superimposed on it.

Germany is in its worst recession since World War II.

Europe's largest economy is poised to shrink nearly five percent this year, says the German Institute for Economic Research, the DIW. The downward spiral is essentially due to a 12.9 percent slump in exports, the institute says.

The latest DIW report underscores how the recession has deepened in Germany in recent months and follows a series of forecast revisions made by other economic research institutes. Just four months ago, economists were predicting that the economy would contract by only 1.1 percent.

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The rapid deterioration of the economic outlook has prompted the DIW to take the unprecedented step of not issuing a growth projection for 2010. DIW president Klaus Zimmermann said world trade was hemorrhaging, making forecasts next to impossible.

"Even in normal times," Zimmermann said, "it's difficult to make predictions about the following year. And, in light of the hard-to-estimate effects of the worldwide economic stimulus programs, we think the current figures are not really meaningful."

The DIW also says it expects investment in equipment and machinery in Germany to fall by nearly 15 percent this year.

The scale of the downturn means that Germany will likely breach the key three-percent budget rule for euro member states and report a budget deficit of about 3.3 percent of gross domestic product this year.

A symbolic picture of the German flag with the year 2009 superimposed on it and euro banknotes in the background.

Germany's public deficit in 2009 is expected to climb by more than 20 billion euros

Although the DIW expects the worst of the recession to be over by early next year, any recovery, it says, will be weak and slow. Zimmermann also forecasts a significant jump in unemployment for 2009.

"The market is still protected by the fact that many companies are not laying off workers and putting them on short work weeks instead," he said. "Even so, we’re going to see at least 700,000 more unemployed this year."

That figure would bring the number of jobless in Germany to 3.7 million.

But, there is hope, the institute says. The downward trend should bottom out in the first quarter of next year due to worldwide economic stimulus measures, low commodity prices and the resulting drop in inflation.

The DIW warns, however, that the sharp economic slump and expensive stimulus packages are hitting national debt levels.

The institute expects German public deficit to climb well above 100 billion euros ($130 billion) in 2010 after topping out at 80 billion this year. By comparison, Germany had an almost balanced budget in 2008.

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