The gloomy results of the widely-followed Ifo economic research institute's business survey were seen as further vindication of the Bundesbank's surprise cut in interest rates on Thursday.
Michael Clauss, an economist at investment bank CSFB, said: ``Interest rates will have to stay very low for the foreseeable future. There must be no risk that they will go up.''
The Bundesbank's action, ahead of Sunday's meeting of G7 finance ministers in Washington, makes plain its concern about the state of the economy. It hopes the half-point reduction in the discount rate to 2.5 per cent, matching its all-time low, will help both by lowering long-term interest rates and bringing down the mark's value against the dollar and sterling.
The central bank has engineered the right conditions for these results by signalling that it will reduce the repo rate, its key money market interest rate, during the coming weeks. It was left unchanged on Thursday.
The pound jumped more than half a pfennig for the second day running yesterday, climbing to its highest level for six months. Sterling rose to DM2.2858 from the previous close of DM2.2796.
Despite the clear signs of slowdown during the past few months, economists were surprised by the scale of the decline in business sentiment last month. The Ifo index for West Germany fell for the fourth month, from 91.8 to 90.4, the lowest since December 1993. The index for East Germany fell from 102.4 to 100.5.
``It is surprising to see confidence falling in spite of better retail conditions and the monetary easing we have seen,'' said Julian Callow of Kleinwort Benson. He said it was a signal of the depth of the problems facing German industry.
On top of structural problems such as high labour costs, businesses have been suffering from the strength of the mark last year and weakness in Germany's main export markets. Mr Clauss of CSFB said: ``There is a lot of disappointment that exports have not yet picked up after the Deutschmark weakening we have seen so far.''
The trade-weighted index for the currency has fallen just over 5 per cent from its early-1995 peak, but export growth has slowed, and orders have slumped this year.
The dismal export picture has been reflected in the broader measures of the economy. The most recent figures show industrial output 4.8 per cent lower in February than a year earlier, and manufacturing orders 4.9 per cent down on the year.
However, most economists still agree with the official assessment that growth will start to pick up again later this year.