The German government cut its 2003 growth forecast today while projecting higher unemployment and warning of the risks of a war in Iraq.
"A possible military intervention in the Middle East could have lasting negative effects on international financial markets, oil prices and consumer and business sentiment," the government said in its annual economic report.
"A war would pose incalculable issues that cannot be taken into account in the annual forecasts," it added, hammering home the anti-war message that has made the government unpopular in Washington.
The report, as expected, cut the growth forecast for 2003 to one percent from 1.5 per cent. It predicted unemployment will average 4.2 million this year.
The report assumed oil prices would average $28 a barrel this year, and interest rates and the euro would remain around current levels. It also assumed the global economy would grow by 3 to 3.5 per cent, up from around 2.25 per cent last year.
The lower growth forecast places a question mark over budgetary forecasts drawn up by the government last November.
The government drew up its 2003 budget in November on the basis the German economy would grow 1.5 percent after expanding last year by 0.2 per cent, its slowest rate in a decade. Germany's economy has been hit by a slowdown in world trade, stagnating domestic demand and a continued hangover from the country's unification boom that has mired its construction industry in recession for six years.
Feeling the pinch, companies are cutting investment and laying off staff. Unemployment this month may hit 4.54 million, its highest level since March 1998, according to media reports.
But businesses also blame government policies for the plight, saying tax increases proposed last year to plug budgetary holes sent completely the wrong signal to consumers.