Western German economy expected to shrink in 1993

THE IFO institute yesterday predicted a 0.5 per cent contraction in the western German economy next year, the gloomiest estimate made so far.

IFO, based in Munich, said that the expected onset of a recession in the west in the first half of next year had forced it to modify previous expectations. In October, the country's five leading economic institutes, including IFO, predicted that western German gross domestic product would grow by 0.5 per cent in 1993.

Overall German GDP is expected to stagnate next year, according to yesterday's revised IFO figures, after growing by 1.5 per cent in 1992. Unemployment is expected to rise to about 3.5 million, including 2.2 million in the west. Despite the rapid slowdown in the economy, IFO was sceptical about any significant easing in inflationary pressures.

The continuing strong increase in utility prices, reinforced by the one-point rise in VAT next month, would mean inflation remained stuck at about 4 per cent. The Bundesbank, whose target is to reduce inflation to 2 per cent, regards the current rate as one reason for holding to its restrictive interest rate policy.

According to IFO, the mood among industrialists and investors, at home and abroad, is much worse than the German economic conditions themselves. 'It has deteriorated to such an extent that one has to speak of a real recession fear,' the report said, adding that pessimism among consumers and investors had led to a sharp drop in orders in recent months.

The weakness in exports would lead to an all-German current account deficit of around DM55bn ( pounds 22.4bn) in 1993, IFO predicted.

Further evidence of the effects of the sudden onslaught of pessimism among German manufacturing came yesterday with Volkswagen announcing that it intended to introduce short-time working at its main Wolfsburg plant in the first quarter of 1993.

A spokesman said that the lay- offs, for a total of seven days, were necessary because of weak orders and the poor economic climate afflicting the car industry. The company had already announced short-time working measures in several other of its German plants.

Lothar Muller, a member of the Bundesbank Central Council, warned yesterday that the European Community had its priorities dangerously wrong in trying to force the pace of monetary union.

Writing in yesterday's Handelsblatt, Mr Muller, who is also president of the Bavarian State central bank, said that the European parliament remained far too weak to give the EC the integrated political underpinnings needed to make an economic union practicable. The EC was incapable of exercising sovereign currency powers, he argued.