The Bundesbank said in a twice-yearly report that the 'prospects for the German economy have worsened notably since the beginning of the autumn'. The German economy - Europe's biggest - slipped into recession in the third quarter as exports weakened. Still, the slowdown has yet to translate into higher unemployment and lower consumer confidence.

The central bank said that, assuming the situation on financial markets calms and the global economy picks up, the German economy is likely to grow by 1.2 per cent in 2010.

But the bank's outlook for next year is far worse than the German government's current official forecast - set in mid-October - of 0.2 per cent growth.

More gloomy data came from the Economy Ministry, which said separately that new industrial orders dropped 6.1 per cent in October from the previous month, following an 8.3 per cent fall in September.

Mr Andreas Rees, an economist at UniCredit in Munich, said he was lowering his 2009 forecast for gross domestic product from a 0.9 per cent contraction to a 1.5 per cent decline.

'The current downswing has clearly the potential to become the worst recession in German history after World War II,' Mr Rees said.

Chancellor Angela Merkel has warned Germans they face a 'year of bad news' in 2009.

Her government has drawn up a stimulus package - containing measures such as tax breaks on new cars and credit assistance for companies - in an effort to soften the impact of the slowdown.

The package, which cleared its final legislative hurdle on Friday with approval from the upper house of parliament, is expected to cost the government 23 billion (S$44.2 billion) and trigger investments of up to 50 billion euros.

However, Dr Merkel has resisted calls for tax cuts, such as the reduction in value-added tax recently implemented by Britain. She said this week that the government 'will not join in a multibillion race simply to create the impression that we have done something'.

Mr Guido Westerwelle, the leader of the opposition Free Democrats, accused her on Thursday of engaging in a 'wait-and-see policy'. 'What we don't need now is minimal packages that are faint-hearted,' he said.

In Friday's upper house debate, a top Merkel ally made a virtue of Germany's caution.

'The Americans, the French, the Spanish and the English, are in a more hectic rush than we are,' said Ms Christian Wulff, the governor of Lower Saxony state. 'They have every reason to be, because property markets and consumption have collapsed there.

'In a phase in which consumption is working here ... and the property situation is stable ... I can only say that we should really keep our powder dry,' Ns Wulff said. -- AP