Germany expects 1% fall in GDP this year

GERMANY'S Economics Ministry offered its gloomiest forecast to date yesterday when it said it expects GDP in the western part of the country to decline by nearly 1 per cent this year.

The sharp slowdown, which cut growth to 1.5 per cent last year, the worst performance for a decade, has now turned into a recession. 'Corporate earnings have come under considerable pressure because of high internal costs. Employment is declining after years of expansion,' the ministry said.

But, contrary to the deep scepticism prevailing among many industrialists, the ministry said it still expected things to pick up during 1993 as long as the necessary preconditions were met.

'Only if there are tough efforts to consolidate public budgets and if wage settlements in western and eastern Germany are considerably adjusted to an economic environment that has clearly worsened can a sharper and more prolonged slump be avoided,' it said.

Progress on wages and public spending is regarded as the key to the Bundesbank reducing leading market interest rates. But the lack of any conclusive results in either area suggests that a rate cut at tomorrow's Bundesbank central council meeting is unlikely. Analysts still point to late February or March as a more probable date, when the central bank can take account of inflation and money supply data from the beginning of the year.

In its January monthly report published today, the Bundesbank said the strong expansionary effects on the German money supply resulting from the large interventions in the exchange rate mechanism since last autumn made it more important to maintain a restrictive course in order to limit the inflationary risks.