Germany facing worst slump since WWII

Germany's economy is poised to shrink by a record six percent this year – the worst recession since World War II – a group of top economic institutes said on Thursday.

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As the economy tanks, unemployment is set to surge by one million this year, the institutes said at a press conference in Berlin.

“The economy is being dragged down by a global and extraordinary dramatic downturn,” said Economy Minister Karl-Theodor zu Guttenberg. “The figures presented by the institutes paint an extremely clear picture.”

The closely watched spring forecast by the institutes is latest in a series of dire predictions for Europe's largest economy and is sure to sure to unsettle Chancellor Angela Merkel five months before a general election.

Despite recent optimism voiced by Merkel this week the economy might have bottomed out, the world's top exporter is not likely to see an improvement any time soon.

"The German economy... is in the deepest recession since the founding of
the Federal Republic of Germany" in 1949, the institutes warned.

The institutes predicted that the recession would continue into 2010, with the economy contracting by 0.5 percent next year and unemployment rising to just below five million.

"On the basis of leading indicators, the institutes expect that the downward trend will continue and we do not believe there will be a stabilisation before the middle of 2010," the report said.

The institutes publish their outlook twice a year, generally just before the government updates its own forecasts.

Berlin is set to release its own view of the economy on April 29 and is certain to revise down its current projection of -2.25 percent for 2009.

Finance Minister Peer Steinbrück said Wednesday the economy was set to shrink by at least five percent this year with output collapsing by 3.3 percent in the first quarter.

The International Monetary Fund also released a downbeat assessment of Germany's economic performance Wednesday, saying it would suffer the worst recession of all advanced economies except for Japan.

The institutes – Ifo in Munich, IfW in Kiel, RWI in Essen and IWH in Halle, together with the Austrian think tanks, WIFO and IHS and the Swiss KOF – called on the European Central Bank to slash borrowing costs to stave off the worst effects of the recession.

"Given the depth of the economic slump and the low inflation in the euro area, the European Central Bank should lower its main interest rate to 0.5 percent," the report said.

The ECB's rate currently stands at 1.25 percent and senior officials at the bank – including Germany's Bundesbank President Axel Weber – have said the rate should not dip below one percent.