The German economy has begun a hesitant recovery but could easily be knocked back into recession, according to the country's leading economic institute.
The Ifo Institute in Munich published a report yesterday cutting its economic growth forecast for this year to just 0.7 per cent - bad news for the government, which had hoped for a tangible economic recovery before next month's election.
Last week saw a steep fall in the institute's business confidence index, a key euro-zone economic indicator.
The news came as the governing council of the European Central Bank decided to keep interest rates steady at 3.25 per cent until it meets again in September.
"Market conditions are, as before, still affected by large instability that prevent solid recovery," said Mr Jan-Egbert Sturm, a market analyst at Ifo.
"On balance, the economic growth traffic lights are no longer on red. Economic recovery, though hesitant, is on its way," he said.
However, there were many factors that could halt the recovery, the report said, such as the current stock market instability and the strong euro.
The report was full of bad news for the government as it begins its re-election fight. The institute said the number of unemployed had not yet peaked and would continue to rise to around 4.03 million, or 9 per cent.
"Only in the autumn months can we expect a fall," the report said. That puts paid to Mr Schröder's promise to reduce unemployment to 3.5 million by election day.
The Ifo suggested that further delay to the country's economic recovery could push up the national debt, risking a budgetary early warning from the European Commission.
The German economy grew 0.2 per cent in the first quarter of this year and a government spokesman said the finance ministry was sticking to its growth forecast of 0.75 per cent for this year and 2.5 per cent for next year.
The spokesman said the economic situation in Germany, the euro-zone's largest economy, proved no threat to the euro.
Mr Hans Eichel, the finance minister, insisted last week that Germany remained "back on the path to growth" after the economy slipped into recession at the end of last year.
But the Ifo index of business confidence, compiled from a poll of 7,000 German company managers, fell to 89.9 points in July from 91.3 points in June.
