Frankfurt, March 17 (Bloomberg) -- Germany may face more economic contractions in coming years if the decline in the ``potential growth'' of Europe's largest economy continues, the Bundesbank said. Germany's trend potential growth -- the rate at which the economy may grow over a longer period without fuelling inflation - - has declined to around 1.5 percent in the last four years from about 2.5 percent in 1992, the Bundesbank said in its monthly report for March. A further drop would mean ``periods of absolute declines in economic production will appear more frequently than before,'' the central bank said. ``This could increase pressure on monetary and fiscal policy to enforce counter-measures if growth deviates only slightly'' from the potential rate.
Germany's economy has barely grown since the recession in the second half of 2001, pushing up welfare costs and eroding tax revenue. Bundesbank Chief Economist Hermann Remsperger said on Friday the economy will expand a smaller-than-expected 0.5 percent this year and the government may breach a European deficit limit for a second year. Chancellor Gerhard Schroeder, trying to reverse a ``dramatic'' weakening of the German economy, last week announced the biggest cuts in welfare in more than two decades and said he'll make it easier for companies to fire workers.
Budget Deficit
The government has little room to increase spending to spur growth, because European Union rules limit the budget deficit to 3 percent of gross domestic product. Finance Minister Hans Eichel has said he can only bring down the budget deficit below that limit if the economy grows at least 1 percent. German growth stalled last quarter, as export growth slowed and consumers held back spending, the Bundesbank said. Investment in equipment and buildings increased, though it's ``too early'' to see the gain as a sign of a turnaround. ``Germany has been in a phase of near-stagnation for more than 2 1/2 years and the outlook is rather subdued,'' the Bundesbank said. Unemployment rose to the highest in almost five years in February. The European Central Bank earlier this month lowered interest rates to 2.5 percent from 2.75 percent earlier this month, saying slower-than-expected growth will help keep inflation in check. The bank, whose main mandate is to control inflation, has said governments need to do more to spur growth. //www.quote.bloomberg.com