German growth will decline by 1.5%, say six leading economic institutes: Bundesbank criticised for being too hesitant Failure to rein in public finances comes under fire

THE GERMAN recession will be deeper and longer than expected, the country's six leading economic institutes said yesterday. German GDP is forecast to decline by 1.5 per cent - a sharp revision from their prediction six months ago of 1 per cent growth. Western German GDP is now expected to plunge by 2 per cent in 1993.

The Bundesbank's strategy of small-step interest rate reductions was criticised as much too hesitant, considering the sharpness of the downturn. 'We had hoped the Bundesbank would move much earlier and lower its rates further. This policy explains to a large degree why the economic decline is continuing,' said Klaus-Werner Schatz, chief economist for the Kiel Institute for World Economics, which is one of the six.

The easing of monetary policy needs to be 'more decisive', the institutes said, while dismissing inflationary fears as unfounded.

But the strongest criticism was reserved for public finances. The institutes warned that the excessive reliance on tax increases, and the failure to rein in spending, were creating a 'severe medium-term problem for Germany's growth potential'.

Further evidence of the slow-down in the west came yesterday from industrial output figures showing a 0.5 per cent fall in March from February. The year-on-year decline in March was 9.7 per cent. On a two-month comparison, industrial output in February and March fell 2 per cent from December and January, and was down 10.7 per cent from a year earlier. The main drops were in manufacturing output, down 12 per cent year-on-year on the two-month comparison, and capital goods production, down 15.9 per cent.

Professor Schatz, speaking on behalf of the institutes, said a fundamental re-orientation was needed in public finances. Pointing to an array of increases in taxes and duties, the institutes said that a failure to make greater savings ran the risk that 'state expenditure as a proportion of GDP remains historically high; that the achievement incentive is reduced; and that the economy's overall growth potential is smaller'.

The six institutes predicted an increase this year of 500,000 in the number of unemployed in the west, making a total of 2.3 million. The annual inflation rate will average 4 per cent. A light recovery should begin by early next year at the latest. A key pre-condition for this is lower interest rates. The institutes expect the discount rate to come down to 6 per cent by the end of 1993.

The condition of the eastern German economy remains 'critical' and there is barely any evidence of self- sustaining economic activity, the institutes said. Most industrial firms in the east continue to operate at a loss. Unemployment in the east is expected to rise to 1.25 million, with a GDP growth rate in 1993 that has been revised down to 5.5 per cent.

The Bundesbank yesterday admitted there would be 'politically unavoidable room for interpretation' in the move to European monetary union. Helmut Schlesinger, president of the German central bank, conceded the possibility of countries joining the third and final stage of monetary union, even though their inflation may be as high as 4 per cent and their public deficit above 3 per cent of GDP, the condition set in the Maastricht treaty.