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. Last Updated: 07/27/2016

Germany Sees Growth Slumping

BERLIN -- Germany's efforts to rein in its runaway budget deficit has suffered a triple setback as slowing growth, an expensive public sector wage deal and rising unemployment darkened the outlook for Europe's biggest economy.

Ending weeks of speculation, the center-left government said Friday it would cut its 2003 growth forecast of 1.5 percent due to mounting evidence of economic weakness.

Sources in Chancellor Gerhard Schr?der's Social Democratic party said the forecast might be trimmed to 1 percent.

A public sector pay deal averted a strike that could have tipped Germany into recession and brought relief to Schr?der's government by sparing Germans a winter of uncollected rubbish, canceled flights and transport chaos.

Schr?der, whose popularity has plunged amid economic gloom since he won re-election last September, had been keen to avoid a strike before regional elections in February that will determine who controls the Bundesrat, the upper house of parliament.

However, the expensive deal, which runs from November 2002 to end-January 2005, looked set to worsen the government's budget problems and could cost many jobs.

The deal came one day after the Federal Labor Office said unemployment adjusted for seasonal factors rose in December to a 4-1/2 year high of 4.197 million and forecast a further rise.

Bundesbank chief economist Hermann Remsperger said signs of recovery in Germany were still few, adding he doubted the country would grow by more than 1 percent this year.

"Currently, concrete signs for an upward movement later this year are still scant," Remsperger said in an interview. "Looking at the present situation, [average 2003] growth above 1 percent would be a positive surprise."

Industrial orders data Friday showed a robust export-fueled 1.7 percent rise in November, but analysts said the foreign orders boom would not last as the euro's rise against the dollar would make German goods expensive abroad.

Trade data released earlier painted a similar picture. Germany's surplus grew in November mainly due to a fall in imports, a sign of weak domestic demand.

Government employers and services union Verdi, representing 2.8 million rubbish collectors, nurses, firefighters and other public servants, agreed a wage hike of 2.4 percent for 2003 and two further increases of 1 percent next year.

But the Finance Ministry said the deal would cost 2.5 billion euros ($2.63 billion) this year and 2.9 billion euros next. The federal government's share of 220 million euros this year was covered by the existing draft 2003 budget, a spokesman said, but local authorities said the pay hikes would lead to enormous strain and cost jobs.

Finance Minister Hans Eichel said the deal meant the country as a whole would have to work harder to reduce its budget deficit, which broke European Union limits last year.

Germany faces an embarrassing rebuke from EU finance ministers Jan. 21 over its failure to keep its deficit under the limit of 3 percent of gross domestic product.

The European Commission has proposed finance ministers give Berlin until May to take corrective action.