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German recession risk seen if war not over by May

BERLIN: Germany could slide into recession unless the Iraq war ends within the next month or so, and its chances of recovery are fading with every day the war continues, leading economists warned on Monday.

Horst Siebert, head of the Kiel-based IfW economic institute, said if the war was any longer than a month to six weeks, Germany faced "zero growth and possibly recession".

Siebert also said battered diplomatic relations between Europe and the United States and among European Union countries would hamper a global recovery long after the war was over.

Stiff opposition from Iraqi troops has dashed hopes of a quick end to the war followed by a US-led global upturn. Instead, oil prices have spiked sharply higher as fears of a longer war have taken hold, and a safe haven flight by investors has shaved more than 5.5 percent off European share prices since fighting began on March 20.

This bodes ill for Germany, stuck in the doldrums for the last two years, and experts say a continued downturn will propel the government's budget deficit way beyond European Union limits this year.

German Finance Minister Hans Eichel has already conceded the budget deficit could top the EU's three percent of gross domestic product limit this year.

The finance ministry has dismissed as speculation a weekend magazine report that the deficit could swell to over four percent compared with the 2.8 percent goal.

Hans-Werner Sinn, president of Germany's Ifo institute, said a lengthy war would drive up oil prices, depress stock markets and wipe out growth in Europe's largest economy this year.

"If the conflict is resolved swiftly, the economy could grow 0.9 percent. However, if the war drags on and the price of oil climbs to $30, that would wipe 0.5 percentage points off growth," Sinn was quoted as saying in Germany's Focus magazine.

Sinn, whose institute produces the closely-watched Ifo business climate index, said a US boycott of German goods in revenge for Berlin's strong opposition to the war would be the final nail in the coffin for growth.

"A 10 percent fall in exports to the United States would erase a further 0.4 percentage point off economic growth. We would then be in recession," Sinn said, adding that a plunge in stock prices would cut a further 0.2 points off growth.

The appreciation in the euro to over $1.10 against the dollar this month already threatens to hurt Germany's export-dependent economy by making its products more expensive abroad.

The economy grew a feeble 0.2 percent last year, almost entirely due to strong exports, while domestic demand idled.

Friedrich Heinemann, an economist at the Mannheim-based ZEW institute, reckons a war of just six weeks would spell disaster for Germany.

"If the war goes on for longer than six weeks - or two months at the most - there'll be no hope for the economy this year," Heinemann told Reuters.

Still, the government is for now sticking to its 2003 growth forecast of one percent, even though Germany's six leading institutes have all sliced their forecasts to between 0.4 percent and 0.9 percent.

The institutes, which include Ifo and IfW, are due to publish their new economic forecasts for Germany on April 15.

The government is expected to publish its next economic forecast in May. -Reuters