The Bundesbank has said there is "no cause for pessimism" about Germany's economic prospects in 2005 despite some recent disappointing indicators.

The German central bank added that it was "possible" that Germany would adhere to the euro-zone deficit guidelines in 2005 for the first time in four years.

Economists at the Frankfurt-based bank said in their monthly report yesterday that consumers and investors were of the opinion that stagnation in Germany would turn to growth this year.

"After a year and a half, the German economy is still in the early phase of an economic recovery," said the report. But there was a note of caution that "developments in the fourth quarter of last year show that the economy has started the new year without any momentum".

The report talked up Germany's economic performance, although the country only narrowly escaped its third recession in four years at the end of last year. Gross domestic product contracted in the last quarter of 2004 by 0.2 per cent after already stagnating in the third quarter.

The Bundesbank said the domestic economic picture in Germany was burdened in recent months by low consumer demand, oil price rises and the rising value of the euro against the dollar.

However, the report pointed to a rise of confidence among German business, with the closely watched Ifo business confidence index at an 11-month high. Similarly, the bank's economists noted a rise in private income and economic expectations, with a "noticeable increase" in consumer confidence.

The bank pointed out that the recent rise in unemployment to more than five million was largely a statistical phenomenon due to a new method of counting the jobless.

"On the other hand, it cannot be overlooked that the lack of competitive jobs is greater than what is expressed in the statistics," said the report, a polite way of pointing out that there may be an additional two million people not showing in the statistics.

"The year-on-year economic cost that results is a considerable cause of the current difficult situation of public finances," said the report. That would make it difficult to cut the budget deficit to below euro-zone limits, the bank said.

"The goal to undercut the 3 per cent ceiling for the first time since 2001 looks possible," said the Bundesbank. However there is a "considerable risk" to that goal from the as-yet unknown effect of economic reforms as well as falling tax revenues.

The federal finance ministry in Berlin said yesterday its tax take for January fell 25 per cent compared to the same time last year.