German business confidence rises despite hard hit

In a twice-yearly report, the German institutes forecast the German economy -- Europe's largest -- will contract by 6 percent this year and expect a "painful" time ahead.  ┬á┬á "Given the depth of the economic slump and low inflation in the euro area, the European Central Bank should lower its main interest rate to 0.5 percent," said Kai Carstensen of the Ifo economic institute, presenting the report at a news conference.┬á┬á Germany is Europe's biggest economy and the world's biggest exporter.  ┬á The institutes forecast consumer prices in the 16-nation euro area would decline by 0.2 percent on average in 2010 and by 0.1 percent this year.  ┬á┬á Carstensen said the ECB should extend the maturities on its tender operations, adding: "If a lasting decline in the credit volume or monetary aggregate in the euro area cannot otherwise be prevented, the ECB should shift to a policy of quantitative easing -- buying company and/or government bonds."  ┬á┬á To combat the recession, Germany has unveiled two stimulus packages it says are worth Ôé¼81 billion.┬á┬á┬á┬á "Against the backdrop of the expected increase in the budget deficit, a further economic stimulus package should be rejected under the current circumstances," Carstensen said.  ┬á┬á The institutes forecast Germany's budget deficit would swell to 5.5 percent of GDP in 2010 from 3.7 percent this year -- far surpassing the European Union's limit of 3 percent of GDP.  ┬á┬á They also forecast German exports, long a mainstay of the economy, would fall 22.6 percent this year before returning to growth in 2010 with a 2.4 percent increase.   ┬á┬á The German economy had suffered the worst of a major shock, Carstensen said, adding: "The earthquake in output is behind us. Now come the aftershocksÔÇö the resulting damage and the clean up ÔÇô above all on the labour market."┬á┬á ItÔÇÖs a bigger contraction than is forecast for most of the world's major economies.  However, according to Ifo boss Hans- Werner Sinn, the latest Ifo survey shows that the outlook for the German economy is actually improving. ┬á "With regard to the business outlook for the coming half year, the skeptical assessments have again been reduced somewhat. It is thus likely that the decline in economic output will slow," he said. ┬á German business confidence has risen from its lowest level in more than 20 years, significantly better than analysts expected a survey has indicated.