By James Arnold BBC News Online business reporter

The shocking cost of German recession

A couple of weeks ago, German official statistics showed that beer consumption had plunged by 4.1% during the first half of this year, by far its worst drought in more than a decade.

After this body-blow, the news this week that Germany is now officially in recession can be greeted with nothing more than a resigned shrug.

And indeed, the news is more complicated than the out-and-out disaster it may appear.

Getting better

Stretching the beer analogy a little further helps illustrate this complexity.

The half-year slump disguises a remarkable access of thirst in recent weeks; in June, hot weather drove beer sales up a whopping 9.2%.

In the same fashion, many German economic indicators have started turning positive this summer.

Unemployment, the economy's main curse, has fallen for five months in a row; the Ifo index, a closely-watched measure of business confidence, has been heading skyward.

Germany may have dipped into recession - by the pedantic measure of two consecutive quarter-years of negative growth - earlier this year, but things are looking up already, optimists say.

Many economists, especially those close to the government of Chancellor Gerhard Schroeder, are predicting enough bounce in the coming months to leave 2003 with flat or even modestly positive growth.

Meddling

Not everyone agrees: the influential DIW think-tank predicts all-out recession to continue this year, with no sign of improvement in 2004.

Trust me, Mr Schroeder says

To return once more to the beer analogy, there are sound reasons for concern.

A major cause for falling German beer sales this year was an irksome new rule which slapped a returnable deposit on cans.

This policy, although minor in itself, has been seized upon by critics as typical of the Schroeder government's approach to the economy.

Although professing their free-market zeal, ministers remain unable to resist the sort of meddling that, ultimately, harms German business.

Chopping and changing

The most potentially alarming example of this is the much talked-about proposal to cut taxes next year.

Although a straightforward-seeming 15.6bn euros (�11bn; $17.7bn) of tax cuts are being brought forward to 2004, their impact may well be diminished by subtle increases here and there.

The government, under pressure from Brussels, insists it will progressively reduce its deficit over the next four years - an aim that seems directly incompatible with the idea of cutting taxes to boost growth.

Far better, say many in the business community, to blow a raspberry at EU deficit rules and set to work on the German economy - or, failing that, at least to tell everyone where they stand.

Watch your step

To be fair, Mr Schroeder still has to tread carefully.

Although forced by the economy to be pro-business, he cannot afford to upset his core supporters in Brussels or the trade unions at home.

He has secured agreement to tackle the most delicate part of his planned reforms - a streamlining of the generous but expensive welfare system - but needs to keep politicians of all colours sweet for the bill to get through parliament.

But by historic standards, he has an extraordinary freedom of manoeuvre.

He has quelled opponents within his Social Democratic Party far more successfully than many feared, and the unions - once a mighty force - have collapsed into internal bickering this summer.