Dec. 11 (Bloomberg) -- Germany’s economy will shrink 2.2 percent next year, the Munich-based Ifo institute said, the second assessment in as many days to predict the worst recession since World War II in Europe’s biggest economy.

The contraction will continue into 2010, with gross domestic product declining 0.2 percent, the institute said today in an e-mailed report. Declining tax revenue and bigger government spending on unemployment benefits will push Germany’s balanced budget to a deficit of 1.4 percent of GDP next year and 2.9 percent in 2010, Ifo said.

“Signals for the German economy are flashing red for 2009,” Ifo said in the statement. “The German economy, which benefited in particular from the strong global economic upswing because of its trade orientation, is now being pulled into the maelstrom that the financial crisis has created globally.”

The latest forecast adds to evidence that Germany is facing its deepest economic crisis since returning to democracy in 1949, piling pressure on Chancellor Angela Merkel to play a more active role in promoting growth. Merkel has been criticized by European leaders including French President Nicolas Sarkozy for doing too little to prepare for the downturn.

Stimulus Plan

Sarkozy at a meeting of European Union heads of state and government in Brussels today aims to persuade EU governments to spend 170 billion euros ($220 billion) to fight the recession. Another 30 billion euros would come from the EU’s central budgets.

France and Germany differ over “what to put on an EU level for a stimulus plan,” French government minister Jean-Pierre Jouyet said today. “Germany is more cautious at the moment and doesn’t want to transfer too much money to the EU.”

Merkel has resisted calls to go beyond a two-year 32 billion-euro program of stimulus measures, equivalent to 1.3 percent of GDP. Germany won’t get into a “senseless competition” with other countries over how many billions to spend, she told a party conference of her Christian Democratic Union on Dec. 1.

France has committed 26 billion euros, also equivalent to 1.3 of GDP, pushing its budget deficit above the EU limit of 3 percent of gross domestic product in 2009, EU forecasts show.

Economy Shrinks

The German economy contracted 0.5 percent in the three months through September and is likely to shrink for a third successive quarter in the final three months of this year, the Bundesbank said last week.

Ifo, which helps prepare twice-yearly economic reports for the government, lowered its outlook from a prediction of 1 percent economic growth made in June. Essen-based RWI, which also advises the government, yesterday cut its 2009 forecast to a 2 percent contraction from 0.7 percent growth.

German business confidence slumped to the lowest level in almost 16 years in November and the VDMA machine makers lobby said last week that orders for plant and machinery dropped 16 percent in October from a year earlier, led by a decline in export demand.

German automakers including Bayerische Motoren Werke AG and Stuttgart-based Daimler AG have cut production by more than 200,000 vehicles this year. Daimler’s Mercedes is also in talks with its workers about shorter hours next year.

“German exports are being reduced drastically,” Ifo said. “Equipment investments will be sharply reduced as capacity utilization declines, profit outlooks collapse and financing becomes more difficult.”

German exports will slump 5.7 percent in 2009 after rising 4 percent this year while gross equipment investments will plummet 4.9 percent after expanding 4.6 percent in 2008. Germany’s jobless rate will rise to 8 percent in 2009 and 9.2 percent in 2010, from 7.5 percent this year, Ifo said.

To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net.

Last Updated: December 11, 2008 07:24 EST