Europe's largest economy, Germany, is showing no sign of emerging from its protracted downturn as the year draws to a close.

Official statistics have shown that German wholesale sales fell by 10.7% on the year in November, signalling that demand remains weak.

Ernst Welteke of the European Central Bank's governing council added to the gloom on Friday by confirming that Germany is likely to exceed its 2.7% deficit target this year due to lower than expected tax revenues.

Under a European Union agreement committing members to budgetary discipline, countries which clock up a deficit of more than 3% could face hefty fines.

Recovery hopes dashed

The news extinguished hopes of an early recovery sparked earlier this month by an unexpected rise in the Ifo index, a closely-watched index of business confidence.

Expectations of a turnaround had already been shaken on Thursday, when a survey from Cologne-based forecasters IW predicted a sharp rise in unemployment next year.

The IW's survey of all 44 German industrial associations showed that 31 of them expected sales and unemployment to fall or stagnate in 2002.

German unemployment has already edged up by one percentage point to 9% during the course of the year.

Annus horribilis

The IW survey completed a grim year for the German economy.

German growth, which contracted by 0.1% between July and September, is now pegged at just 0.25% for the year as a whole, down from nearly 3% in 2000.

Analysts have attributed Germany's woes to its relatively high dependence on exports to the US, which slipped into recession in March.

They add that a downturn in Germany, which accounts for 35% of the eurozone's economic output, has worrying implications for the single currency area ahead of the launch of euro notes and coins.

High and rising budget deficits in Europe's leading economy could push the euro lower against the dollar, fuelling inflationary pressures.

This would in turn limit the European Central Bank's scope to deliver urgently-needed interest rate cuts aimed at boosting the flagging economy.