Germany's Ifo economic research institute sharply reduced its growth forecasts for the German economy, the biggest in the 12-country euro zone, warning that the current slump was not yet over.

Nevertheless, Germany will gradually overcome the recession it has been in since the middle of the year and things could start looking up in mid-2002, or maybe even sooner, if the European Central Bank cuts rates and the government brings forward the next stage of its planned tax reform, Ifo predicted at a news conference.

Ifo, whose widely watched business climate index rose slightly in November for the first time since July, said "the German economy has yet to reach its trough - in terms of capacity utilisation - but will probably do so in the second quarter of 2002".

In an interview published today, the German finance minister insists the economy is not in recession and will recover early next year.

Mr Hans Eichel told the magazine Wirtschaftswoche that Germany would only be in a recession "if GDP shrinks in the fourth quarter as well".

Recession can mainly be found "in people's heads, but not in the economy itself", he added. German gross domestic product was negative in the third quarter, after stagnating in the second quarter. The Ifo institute, one of the six leading economic think tanks in Germany, said it was predicting gross domestic product (GDP) growth of just 0.5 per cent this year and 0.6 per cent next year after growth of 3.0 per cent in 2000.

That represents a sharp downward revision from forecasts made in July - long before the September 11th terror attacks in the US - when Ifo had been predicting German growth of 1.2 per cent this year and 2.2 per cent next year.

But it was also more pessimistic than the post-attack forecast drawn up in October by all six German institutes, which had been predicting growth of 0.7 per cent this year and 1.3 per cent in 2002.

Ifo also predicted that the German public deficit would amount to 2.7 per cent of GDP this year.