May 23 (Bloomberg) -- Chancellor Gerhard Schroeder, whose party was defeated in a vote in Germany's most populous state yesterday, announced he will seek early elections even as opinion polls show him trailing the opposition nationally.

``This highlights Schroeder's despair,'' Udo Vorholt, a politics lecturer at the University of Dortmund, said in an interview. ``His government is in a real plight.''

Germany would elect the opposition Christian Democrats with a 15.5 percent lead over Schroeder's Social Democrats, an Allensbach poll of 2,104 voters published May 18 showed. No polls have been published since yesterday's announcement that he plans to hold elections this fall, a year ahead of schedule.

The Social Democrats lost power in North Rhine-Westphalia after 39 years, winning 37.1 percent of the vote compared with 44.8 percent for the CDU. Support for Schroeder, 61, has slumped amid a stagnating economy and rising unemployment -- the number of people out of work has risen by 1 million to close to 5 million since he took office in 1998.

A month ago, Germany's six leading economic institutes halved their forecast for growth this year to just 0.7 percent. The European Commission expects Germany to be the slowest-growing economy in the 25-nation European Union in 2005.

`No Time to Lose'

``Germany has no time to lose and Schroeder knows this, and he knows that the SPD-Green coalition will not be able to resolve the issues at hand,'' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt, in a telephone interview. ``Calling an early election is a clear signal that he is going for a pro-reform course.''

Defeat in North Rhine-Westphalia will rekindle calls from coalition lawmakers for policy changes to help court traditional voters ahead of the early elections. His decision to make the first cuts in jobless benefits since World War II, which took effect in January, sparked weekly demonstrations across Germany.

Such policies have also prompted a backlash within his own party: SPD Chairman Franz Muentefering last month compared investors seeking short-term gains to the biblical plague of locusts that descended on Egypt, stripping it of vegetation.

Against such resistance, Schroeder has vowed to continue with policies that include a 6 percentage-point cut in corporate taxes. Since winning re-election in 2002, his government has tightened rules on eligibility for jobless benefits as well as cutting them and reduced health-care, introducing a quarterly fee for visits to the doctor.

`Reforms Need Time'

``Time is needed before the reforms will have a positive impact on the lives of all people in our country,'' Schroeder told reporters in Berlin yesterday. ``For the continuation of the reforms, which in my view is necessary, I consider the support of the majority of Germans essential.''

The Allensbach poll showed support for the SPD was 28.6 percent, 9.9 points less than in the 2002 national vote. The poll, carried out from April 23 to May 8, had a margin of error of plus or minus 2 points.

After the loss of North Rhine-Westphalia, Schroeder's task to govern will become harder as the opposition's majority in the upper house of parliament, which needs to approve most tax legislation, will increase to 43 of 69 seats.

``Anything that helps avoid a looming stalemate next year is to be welcomed,'' said Ludolf von Wartenberg, executive director of the BDI industry federation, which represents 107,000 companies including DaimlerChrysler AG and Siemens AG, in an interview.

Blocking Budget

Schroeder first won election in September 1998. Since November that year, the DAX index of German stocks has barely budged, the seventh-worst performer among the world's primary stock indexes. The Dow Jones Industrial Average is up 22 percent, and the FTSE 100, the main index in Tony Blair's Britain, is up 8 percent.

The opposition CDU and its Bavarian affiliate, the CSU, would be able to block Schroeder's legislation, including the annual budget, from next March if the CDU wins an election in the Social Democratic-led state of Rhineland-Palatinate.

In the lower house of parliament, he has 304 seats to the CDU and CSU's 297: four dissenters from his coalition are enough to block proposals.

``Schroeder's hands are tied,'' Uwe Andersen, a politics professor at the University of Bochum, said in an interview May 22. ``He is factually dependent on the opposition to pass major projects into law.''

The Christian Democrats said they will announce their candidate for chancellor on May 30. Schroeder's CDU challenger will probably be 50-year-old Angela Merkel, the party leader, said Ronald Pofalla, a deputy chairman of the CDU's parliamentary group. It would be the first time a woman has stood for Germany's top political post.

``As far as personalities go, Schroeder might think he has a chance against Merkel, but she's not a weak candidate,'' said Polleit.

To contact the reporters on this story: Claudia Rach in Berlin at crach1@bloomberg.net; Andreas Cremer in Dusseldorf, Germany at acremer@bloomberg.net.

Last Updated: May 22, 2005 19:06 EDT