The Bundesbank has warned that Germany could breach the Stability Pact criteria for the fourth consecutive year in 2005.

The bank also warned in its monthly report yesterday that Germany's economic recovery and growth in consumer spending could slow after the second quarter because of rising oil prices and continued job losses.

"All in all there is, from today's perspective, a risk ... of not being able to adhere to the three per cent ceiling," said the bank in its August report. It warned that Brussels may reject Berlin's plans to make up its budget deficit with €15 billion in privatisation proceeds.

"The acquisition of assets is seen as an investment expense that justifies debt financing. On the other hand, however, asset sales are not being used to pay off debt, instead the proceeds are being drawn on to stay within a borrowing limit," said the central bank.

The bank said that further oil price rises posed a "serious risk" to the recovery, echoing the worries of the European Central Bank (ECB) that rising oil prices may hurt the euro zone economy . The Bundesbank also expressed concern at Germany's continued high dependence on exports, what it called the economy's 'Achilles heel' of domestic recovery.

"The German economy received renewed strong growth impulses from abroad in the spring. The economic stimulation that had already grown stronger in the first quarter won yet more momentum in the second quarter," said the bank. "It is not certain if the current speed of expansion can be maintained in the coming months."

The Bundesbank had some sharp words for the government as it tries to push through its economic reform programme against increasing public resistance.

"Apparently [the government] has not yet succeeded in communicating convincingly the necessity and the foreseeable purpose of the reform project to enable private households to plan better," said the bank.

The Bundesbank's qualified optimism about Germany's growth prospects is matched by the country's leading economic institutes. They have raised their growth forecasts for the euro zone's largest economy to as high as 2.1 per cent.

The bank's survey of economic investment showed a further drop in demand in the troubled construction sector and a 25,000 rise in unemployment set off against a small increase in spending on factories and machinery.