Deutsche Bank warns of massive 2009 recession

Deutsche Bank's chief economist Norbert Walter on Friday warned Germany could be in for a dire 2009 with Europe's largest economy possibly shrinking a massive four percent.

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In an interview with the daily Bild newspaper, Walter said there was a 30 percent chance that the German economy will slump into a major recession next year.

“German gross domestic product could contract by up to four percent,” Walter told the paper, adding that at best the economy would likely shrink by one percent.

Walter called on the government to take immediate action to help stave off what would be the worst economic performance in Germany's post-war history. In order to help stimulate consumer demand to get people buying again, he said Germany should “immediately and for a year” slash its value-added tax (VAT) from 19 percent to 16 percent. “Otherwise it will no longer be possible to avert the crash,” he said.

Following widespread criticism that Berlin was not doing enough to bolster the economy, German Chancellor Angela Merkel on Thursday defended her government’s €32-billion stimulus package. Germany is “among the leading countries in Europe in responding to the economic crisis,” she said in a speech to parliament.

Merkel reiterated that her government would discuss the economic situation in January to determine whether other measures were necessary. However, she said there would be no “race for billions” in spending or tax cuts.

The German central bank said on Friday it expects the economy to contract by 0.8 percent next year. The Bundesbank had already said it expected the country to remain in recession in 2009, but had not provided a forecast figure.

The Bundesbank forecast is now in line with one by the Organisation for Economic Cooperation and Development (OECD). In 2010, the economy should pick up again, and grow by 1.2 percent, the central bank said.

German output shrank in the second and third quarters of 2008, putting the country in a technical recession.

The government officially still expects the economy to grow by 0.2 percent next year, but few now really expect that to occur, with Finance Minister Peer Steinbrück already saying it could shrink by up to 1.0 percent.

Germany's economic ace in the hole, exports, have been slammed by the global financial crisis, and business investment has dried up also owing to tighter credit conditions.