Europe's biggest economy is on the edge of a recession, leading German economic research institutes have warned. The gloomy news was a sharp contrast to a strong showing by European stock markets on Tuesday.
Lower demands for exports will hurt Germany
The world financial crisis will bring Germany's economic growth nearly to a halt, according to a twice-yearly economic report released in Berlin. The economic institutes slashed their growth forecast for 2009 to just 0.2 percent. Previously, the institutes had projected 1.4 percent growth.
Germany is expected to finish out 2008 with an overall growth rate of 1.8 percent.
"The German economy is on the edge of a recession," said Udo Ludwig from the IWH economic institute.
Germany depends on high-end exports for its well-being
Germany, the world's leading export nation, faces a sharp fall in foreign demand as the world economy slows. The weaker growth outlook could result in job losses of 400,000 in Germany next year, the institutes also warned.
Germany's economy ministry will unveil its own growth estimates on Thursday, which are also expected to be revised sharply lower.
Investor confidence plunges
These growth rates make up the economists' "basic scenario." But in view of the exceptionally high level of uncertainty brought by the international financial crisis, the economists also drew up a more pessimistic "risk scenario." In this scenario, the German economy would actually contract by 0.8 percent next year.
But the experts said they do expect the economy to stabilize by the end of 2009, according to the report. The institutes participating in the study include Ifo in Munich, IfW in Kiel, RWI in Essen and IWH in Halle, together with the Austrian think tanks WIFO and IHS and Switzerland's KOF.
Germany's ZEW index of financial sector confidence, also released Tuesday, plunged this month. However, the institute said it would likely rebound following a major European bank rescue plan announced Sunday.
The indicator fell by 21.9 points to minus 63.0 points, the second lowest level since the start of the survey in December 1991. The ZEW economic research institute said its results had been gathered in the heat of the international financial crisis.
France, Britain also struggling
Germany isn't alone in looking ahead to tough economic times. The Bank of France predicted growth will drop to minus 0.1 percent in the third quarter, showing the country was heading into recession after a 0.3 percent contraction in the previous three months, according to a report released Tuesday.
Germany's stock market has been on a wild ride
Britain's inflation rate was also reported to have reached a 16-year high of 5.2 percent in September, AFP news agency reported Tuesday. Britain's statistics office said higher gas and electricity costs have fueled the increases. The inflation level is more than double the government's 2 percent target. Economists said they believe inflation will level off and return to the target level by the end of 2009.
Stocks soar on rescue plan
The dour outlook was in sharp contrast to stock price increases around Europe. Investors took comfort in the coordinated European bank rescue plans announced Monday. In morning deals on Tuesday, European shares rose nearly 5 percent.
Frankfurt was trading 3.14 percent higher early on Tuesday. The Paris stock market jumped 4.18 percent, a day after rising more than 11 percent, its largest-ever one-day gain. London was up 3.40 percent in early trading and Madrid rose 3.31 percent.