Leading German economic institutes say Europe's largest economy is caught up in the maelstrom of a global recession. Their forecast is even gloomier than the IMF's prediction for 2009.
The finance minister is on the front line of efforts to reverse Germany's worsening downturn
Germany's leading economic institutes are predicting the worst economic decline since the country was founded in 1949. In their annual spring report, they say the country's economy will shrink by 6.0 percent this year.
The world's top exporter is not likely to see an improvement any time soon, either.
The institutes predict that the recession will continue into 2010, with the economy contracting by 0.5 percent next year. The economic experts also say unemployment will rise to just under five million jobless by the end of next year.
"On the basis of leading indicators, the institutes expect that the downward trend to continue and do not believe it will bottom out before the middle of 2010," the widely-watched report states.
The institutes publish their outlook twice a year. The spring report 2009 comes a day after the latest projections by the International Monetary Fund, IMF, which said the German economy was likely to contract by 5.6 percent, pushing unemployment rates up.
With global trade shrinking and the world economy gripped by recession, the International Monetary Fund has slashed its 2009 growth forecast for the entire 16-member euro zone by another one to 4.2 percent.
But while their prognosis for Germany looked especially bad, the IMF said Germany's government still had more room to maneuver because of sound fiscal policies in the past, and should be spending extra public funds to make up for the massive decline in exports.
Steinbrueck and Guttenberg have their work cut out for them
"Could they do more? The answer is yes," IMF economist Jorg Decressin said. "This is a case where a country has done its homework during the good times... and can take advantage of this during the bad times."
As the world's leading export nation, Germany now appears to be bearing the brunt of the global recession, with the IMF saying unemployment could climb to 10.8 percent in 2010 from 9 percent this year. Germany's jobless rate was 7.3 percent last year.
“ I think we were all agreed around the table that we have a very difficult year ahead of us," said German Economics Minister Karl-Theodor zu Guttenberg at a news conference on Wednesday following an economic summit with Chancellor Angela Merkel and leaders from industry and unions. Finance Minister Peer Steinbrueck told reporters there had been a slump of 3.3 percent in the first three months of the year.
Labor market crisis
The IMF's latest World Economic Outlook underscores the risks that the economic crisis is rapidly turning into a labor market crisis, with euro-zone unemployment set to rise this year to 10.1 percent before edging up to 11.5 percent in 2010.
This is despite the massive stimulus packages introduced by European governments and the number of companies across Europe placing employees on short-term working contracts rather than laying them off. The euro-zone jobless rate stood at 7.6 percent in 2008.
"The euro area is coming out of this crisis somewhat later than the US because to some extent the policy stimulus kicked in later," Decressin told reporters in Washington.
But it is a picture repeated across Europe, with the IMF saying France faces a 3 percent fall in growth in 2009 and a meagre 0.4 percent pickup next year, while Italian GDP should sink by 4.4 percent this year.
Britain, which has been battling with falling consumer demand, a housing market collapse and a drawing in of its key financial sector, is expected to stage only a modest recovery after this year's 4.1 percent contraction. The IMF predicts British unemployment will jump from 7.4 percent in 2009 to 9.2 percent next year.
Ireland has been particularly badly hit by the world recession and the credit crunch, and the IMF predicts that Irish economic growth will fall by a disastrous 8 percent this year and by 3 percent in 2010 after a collapse in the nation's construction boom.