Recession Warning

In its biennial report, the Bundesbank said the "prospects for the German economy have worsened notably since the beginning of the autumn."

The central bank had already predicted the German economy would continue shrinking in 2009 -- after it sank into recession in this year's third quarter -- but had not said by how much.

The bank said it did not expect the German economy to pick up again until 2010 when it should grow by around 1.2 percent.

Dire predictions

Erring on the side of optimism, the government maintains the economy will still expand next year, albeit by only 0.2 percent.

But Norbert Walter, chief economist at Deutsch Bank, has warned that Germany's gross domestic product (GDP) could shrink up to 4 percent in 2009.

"It's around a 33 percent chance that that will happen," he told German daily newspaper Bild.

That would represent the worst crisis since the Federal Republic of Germany was founded. The best-case scenario would see GDP shrink 1 percent.

Russia, Mideast knock-on effect

Walter said one possible cause for the massive drop in output could be the flow-on effect of poor economic conditions in Russia and the Middle East.

He recommended that the government lower value-added tax "immediately and for one year" to 16 percent, in order to boost domestic consumer spending.

"Otherwise, there is nothing to stop a major crash," he told the paper.

Industry's back to the wall

Further complicating matters for Germany is that exports -- usually the nation's economic ace in the hole -- have fallen across the board.

The Ministry for Economics and Technology said German industrial order books contracted by a hefty and far bigger-than-expected 6.1 percent month on month in October after shrinking by a revised 8.3 percent in September.

"What started off as a relatively normal correction (in new orders) from very high levels has developed into a serious collapse," said ING economist Carsten Brzeski.

"With emerging market growth slowing down and a recession in the industrialized world, the near term outlook for German industry looks anything but rosy," he said.

Luxury carmaker BMW reported Friday that sales plummeted by 25 percent in November to 96,570 vehicles.

Consumers increasingly skeptical

Meanwhile, Germans are becoming increasingly worried about a major recession, recent studies show.

Nearly three quarters of those asked in a study published Thursday, Dec. 4, were sure that "the worst part of the crisis still lies ahead," according to the study's organizers, ARD Deutschlandtrend. That represents a 10 point increase from a month earlier.

Also, half of respondents were worried about their personal future.

The European Central Bank is also pessimistic about 2009. On Thursday, they lowered growth forecasts for this year and next. GDP in the Eurozone is expected to drop 0.5 percent in 2009, European Central Bank Jean Claude Trichet said Thursday, explaining his decision to slash interest rates.