Germany's economy is unlikely to emerge from its economic slump in the near future and will be lucky to stave off recession this year, according to the country's leading economic institutes.

Berlin-based DIW, Ifo in Munich, HWWA in Hamburg, RWI in Essen, IfW in Kiel and IWH in Halle slashed their forecast for German growth this year to just 0.5 per cent, compared with a previous forecast of 1.4 per cent, while also warning Germany's budget deficit will again shatter euro-zone guidelines this year.

"The German economy remains in a phase of prolonged weakness," said the institutes, known as the "six wise men", in their spring report.

"Economic recovery can be expected in the second half of this year. But it will remain sluggish." With no upturn in sight, Germany would continue to be a dead weight on its fellow eurozone members in 2003, the economists said, complicating interest policy decisions for the European Central Bank (ECB).

After last year's budget deficit of 3.5 per cent of GDP, Germany will once again breach the Stability and Growth Pact guidelines this year, the report said, despite Berlin's promises to the contrary.

This year's deficit is likely to be 3.4 per cent of GDP partly due to increased public spending from a continued rise in unemployment. However, the deficit could fall to 2.9 per cent in 2004 thanks to a "slightly more favourable economic situation".

The mild improvement in the economic situation should lead to a "firmer recovery and slightly improved domestic demand" next year. But the recovery would not be as a result of real improvement in Germany's economic situation, the economists said, but because of the number of public holidays falling on weekends. Germany's overall economy would "lack dynamism in 2004", the report added.

The government rejected the gloomy outlook presented in yesterday's report. "The institutes underestimate the dynamic of our employment reforms," said Mr Wolfgang Clement, the economics and labour minister.