The German economy is suffering from a crisis of confidence and requires fundamental structural reforms to lift its growth rate and make it globally competitive, the Bundesbank said today.
"If the status quo persists, the potential growth rate of the German economy will continue to decline from roughly 1.5 per cent at present to 1 per cent," the Bundesbank said in a report to the German government entitled "Ways out of the Crisis".
The report, part of regular economic advice provided by the Bundesbank to the government, was presented to Berlin in the last few weeks. But in an unusual move, the central bank also decided to release the document to the public.
The German economy has stagnated for two straight years, reporting growth in 2002 of 0.2 per cent - with only slight growth expected again this year.
Unemployment has hit a five-year high and bad loans are rising in a deeply troubled banking system.
The Bundesbank said these problems are structural in nature, not cyclical, and they require fundamental reforms to wage and labour policies, the social security system and fiscal policy to help reverse the trend.
Although there is no risk of deflation yet, a prolonged period of weakness with low usage of industrial capacity and rising joblessness cannot be ruled out, the Bundesbank said.