Germany slashes 2009 growth forecast as crisis bites

BERLIN (Reuters) - Germany slashed its forecast for 2009 gross domestic product (GDP) growth to 0.2 percent from 1.2 percent on Thursday and said the slowdown could be sharper if government measures fail to stabilize the financial system.

The German Economy Ministry stuck with its forecast for 2008 growth of 1.7 percent, but said there was a high degree of uncertainty about its projections for next year because of the scale of the crisis.

Chancellor Angela Merkel's government has unveiled a bank rescue package of up to 500 billion euros ($683.1 billion).

"In our autumn forecast, we have assumed the financial market crisis, notably in the wake of the agreed rescue package, will not spur greater upheaval and that the banking system will survive the crisis without major damage," the ministry said.

At a news conference to present the new forecasts, Economy Minister Michael Glos declined to give a worst-case scenario for Europe's largest economy, instead highlighting the positive effects of a decline in oil prices and the euro for both private consumption and exports.

The government is assuming an average euro rate of $1.42 and an oil price of $95 per barrel for 2009. Its 2009 growth projection foresees 0.3 percent growth in private consumption after two straight years of contraction and a 1.2 percent rise in both exports and imports.

Europe's biggest economies, including Germany, France and Italy are all at risk of falling into a recession this year and Berlin is not the first government to revise down its expectations for 2009.

Italy has cut its 2009 growth forecast to 0.5 percent from 0.9 percent previously and French Prime Minister Francois Fillon said earlier this week that his country could undershoot an official projection for growth of 1.0 percent next year.

Earlier on Thursday, the German chambers of commerce and industry (DIHK) cut their 2009 growth forecast to 0.5 percent, down from a previous projection of 1.0 to 1.4 percent.

The German financial rescue package, unveiled on Monday after weeks in which Merkel's government played down the need for a sector-wide plan, includes 400 billion euros in guarantees to help banks get over a liquidity squeeze and up to 100 billion euros in state funds, mainly to recapitalize banks.

The package, coordinated with Germany's European partners, initially calmed stock markets, but they have resumed their declines in recent days, a drop Glos attributed to fears of a worldwide recession.

(Writing by Noah Barkin; Editing by Ruth Pitchford)