German economic gloom adds pressure for ECB rate cuts

German economic gloom adds pressure for ECB rate cutsBerlin - Leading economic forecasters called Thursday on the European Central Bank to deliver bigger-than-forecast rate cuts, after they predicted Germany's dramatic economic slide would roll through into 2010 and trigger a surge in the nation's unemployment.

The call was made in a joint report produced by the Munich-based Ifo institute, the Kiel-based IFW Institute for the World Economy, the Zurich-based ETH Economics Research Unit, the Institute for Economic Research in Halle and the Essen-based RWI group, and Vienna's Institute for Higher Studies.

Speaking at a release press conference, Kai Carstensen from Munich-based Ifo institute said the economic earthquake created by this year's collapse in production was now behind Germany.

But he warned: "Now come the aftershocks ... above all on the labour market.

"This will take a long time and will be painful," Carstensen said, with the institutes predicting Germany's unemployment rate would jump to 10.8 per cent in 2010 compared to 8.6 per cent in 2009. The nation's economy is expected to shrink by 6 per cent this year.

The institutes' so-called spring report is likely to add to the pressure on the European Central Bank (ECB) to forge ahead with its rate-cutting cycle. The institutes are calling on the ECB to produce larger-than-forecast borrowing cost reductions in the coming months.

After trimming rates by 25 basis points to an historic low of 1.25 per cent at its meeting earlier this month, the ECB is expected to bring the rate reductions to an end possibly as early as next month by cutting the cost of money to 1 per cent.

But the institutes say the ECB should go further and reduce borrowing costs in the 16-member eurozone to 0.5 per cent.

"Given the depth of the economic slump and the outlook for eurozone inflation in the foreseeable future, to remain well below the ECB's target, a more expansionary monetary policy is appropriate," the report said.

Further underscoring the fragile state of the eurozone economy, new industrial orders plunged by 34.5 per cent in February compared with the same month last year, the European Union's statistics office said Thursday.

What is more, the institutes' grim German job market projections underscores fears that the economic crisis is now rapidly transforming itself into a labour market crisis.

As the world's leading export nation, Germany is feeling the full force of the global recession and plummeting world trade. The institutes say there will not be any sign of a recovery in the nation before the end of the year. German exports would tumble by 22.6 per cent in 2009, they said.

The institutes predict German economic growth will decline by 0.5 per cent in 2010. The International Monetary Fund (IMF) on Wednesday again slashed its global economic forecasts and warned that the world economy was now in the grip of its deepest recession in decades.

Indeed, Thursday's report echoes the bleak outlook painted for Germany by the IMF, which predicted that the nation's economy would contract by 5.6-per-cent this year and by 1 per cent in 2010.

The German Government has already signalled plans to drastically revise-down its current recession rate forecast of 2.25 per-cent to a contraction of more than 5 per cent.

The gloomy prospects of an extended recession in Germany came despite the emergence of cautious optimism around the world that the big government economic stimulus packages and hefty interest rate cuts will help lay the foundations for an economic pickup in the runup to the end of the year.

The stronger-than-expected improvement in a key European economic sentiment survey, the April composite purchasing managers' index (PMI) released Thursday, has already added to expectations the eurozone will report a fall in second-quarter growth significantly less dramatic than in the previous two quarters.

The latest PMI report also came in the wake of another key sentiment survey, the ZEW report, showing German investor confidence surging in April to near a two-year high.

"In all, then, coupled with other recent surveys like the German ZEW, there are some signs here that the worst of the euro-zone economic downturn may well be over," said Capital Economics research group European Economist Ben May.

But at Thursday's press conference in Berlin, Carstensen said the speed of any recovery would depend on the return to confidence in the banking sector, which originally helped to trigger the global economic crisis. (dpa)