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Germany

New Data Shows Recession Gaining Pace in Germany

Germany is caught in the midst of a gloomy economic winter with the government attempting to hammer together a new stimulus package. Meanwhile a slew of fresh data suggests a deepening recession is taking hold.

SOS box in front of the Frankfurt skyline

The German government has been accused of not doing enough

Figures released this week showing a dramatic 10.6 percent plunge in German exports in November along with a hefty drop in factory orders and a larger-than-forecast rise in December unemployment point to the economic downturn rapidly gaining ground.

Meanwhile, the country's manufacturing sector is also feeling the pain from the global economic crisis, with orders for German industrial goods diving 6 percent, much worse than economists had feared.

A woman blows her nose

Germany is no longer the sick man but its hardly healthy

Figures to be released Friday are tipped to show German industrial production in the nation falling by 2 percent in November. This would represent a drop of 5.5 percent over the year.

After sinking into recession during the third quarter last year, economists have been revising down sharply their 2009 forecasts, with projections pointing to the German economy contracting by between 2 and even 4 percent this year.

Leading German companies have already announced plans for layoffs and production cuts as global economic growth spirals downwards.

The German Labor Office said this week that unemployment in the nation rose for the first time in nearly three years in December with the number of jobless rising in seasonally adjusted terms by a more-than-forecast 18,000.

"The December figures show that the economic crisis has reached the labor market," said Labor Office chief Frank-Juergen Weise when releasing the data.

Germany in better shape to cope, say economists

But Elga Bartsch, economist with Morgan Stanley, said that there is a key difference between the current downturn in Germany and the one that hit the country in the early part of this decade.

"Back then, Germany was seen as the sick man of Europe, mired in deep-rooted structural problems," said Bartsch. "Today, Germany is in for a major cyclical downturn, but it does so on much stronger structural footing."

The new batch of bleak economic data comes as German Chancellor Angela Merkel's government attempts to piece together a second stimulus package worth up to 50 billion euros ($68 billion) to help the nation limp through what is expected to be the country's biggest economic downturn since World War II.

Angela Merkel

When it comes to finance, Merkel has been called 'Madame Non'

This follows a first raft of measures worth over 30 billion euros agreed last November that was widely derided by critics as being too puny as it included only 12 billion euros of real new spending.

On top of that, Berlin has earmarked 100 billion euros to help German companies face the growing world-wide economic crisis.

Small- and medium-sized firms -- regarded as the backbone of Germany's economy -- complained on Thursday that the credit crunch is still harming their ability to get fresh funds from the banks.

"After a significant easing last year, many small- and mini-firms in particular are suffering from restrictive lending," the German Association for Small- and Medium-sized Businesses (BVMW) said in a statement.

"They are still really feeling the effects of the banking crisis and the collapse of (US investment bank) Lehman Brothers," said the association, which represents 3.3 million firms in Germany's powerful "mittelstand" sector.

The misery is only set to get worse as the year unfolds, analysts say.

The president of the influential IFO economic institute, Hans-Werner Sinn, warned this week that no recovery was likely before 2011 and said unemployment could rise as high as four million.

Pressure building during election year

Frank-Walter Steinmeier and Angela Merkel

Partners and rivals: Steinmeier and Merkel

Merkel is also battling to strike a balance between a push by her conservative Christian Social Union allies for big tax cuts to spur growth and her Social Democrat coalition partners, who have been resisting lowering taxation.

Such prevailing gloom means the economy will be one of the main battlegrounds throughout 2009 -- a key political year, during which Germany holds a parliamentary election on Sept. 27 and several crucial state polls.

The first of these state elections is due on Jan. 18 in the western state of Hesse, home to Frankfurt, Germany's major financial centre.

The latest opinion polls in Hesse suggest a coalition of Merkel's CDU party and the free-market Free Democratic Party will win a clear majority. The CDU governs at the national level in coalition with the center-left Social Democrats.

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