"The German economy, which because of its trade orientation had benefited from the strong upswing in the global economy, now conversely is being pulled under by the ... financial crisis," Ifo said in a statement.
"On average for the year, real GDP (gross domestic product) ... will decline by 2.2 percent. In the wake of the world recession, exports will be reduced drastically," it added.
Berlin's current forecast for next year is for 0.2 percent growth but with Germany having already entered a technical recession in the third quarter, many economists have already issued much bleaker forecasts.
The German central bank has estimated that Europe's biggest economy will shrink 0.8 percent in 2009. For 2008, the government sees growth of 1.7 percent, while Ifo put it at only 1.5 percent.
Ifo said that "stabilisation is not expected until 2010, with the gradual subsiding of the financial crisis," with the economy likely to contract 0.2 percent that year.
In October, a group of leading institutes to which Ifo belongs, forecast 1.8 percent growth in 2008 and 0.2 percent growth in 2009. The economy contracted in the second and third quarters of 2008 however, plunging the country into a technical recession that many expect to be deep and prolonged.