Growth is forecast to pick up

It was the German economy's weakest full-year performance since the 1993 recession when it shrank 1.1%.

Germany's economic woes and inability to keep its budget deficit within European Union limits have triggered a legal challenge from the EU.

But economists believe that Germany's recession is over the worst and expect to see growth of about 1.5% in 2004.

Worried workers and slack trade

Shoppers' reluctance to spend during 2003 sapped domestic growth, which was too feeble to make up for a slow-down in exports, the Federal Statistics Office said.

Economy Minister Wolfgang Clement predicted a brighter future with shoppers taking to the stores again and industry investing to satisfy "pent-up demand".

Exports rose by a sickly 1.1% in 2003, while consumer spending shrank 0.2% and investment in German industry contracted 3.3%.

"Overall, the economic development was disappointing in Germany in 2003, like in the previous two years," said Johann Hahlen, President of the Federal Statistics Office.

"There were signs of a weak recovery in the second half of the year but one can't yet speak of a sustained revival," he said.

Recovery hopes

Germany's centre-left government is expecting consumers to start spending more once they get their hands on tax cuts - totalling worth 7.8bn euros (�5.5bn; $9.5bn) - it pushed through parliament last autumn.

"One can certainly see 2003 as an economic low point," said DZ Bank economist Bernd Weidensteiner.

He endorsed Mr Clement's view that choked-up demand from industry and consumers would push up spending in 2004.

"Investment in particular could rise significantly this year....private consumption will also improve - it can hardly sink any further," said Mr Weidensteiner.

But economists also fear that currency fluctuations could scupper Germany's chances of improving its export performance, dampening industry's willing to invest.

The European single currency kicked off 2004 by hitting record highs against the dollar and is expected to remain strong as the dollar's decline has been sparked by worries about the record US trade deficit.

Budget failure

Germany racked up a 2003 budget deficit of 4%, missing the ceiling set by the EU's stability pact by a full percentage point.

The shortfall was widely expected. The unapologetic stance taken by the German government and fellow offender France has prompted the European Commission to demand a ruling from the European Court.