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UPDATE 1-Merkel sees economy facing big challenge-officials

Published 10/20/2009, 12:01 PM
Updated 10/20/2009, 12:03 PM

(Adds details, background)

BERLIN, Oct 20 (Reuters) - Chancellor Angela Merkel said she expects the German economy to face some "extremely serious months" at the start of next year, participants in a meeting of her conservatives said on Tuesday.

Merkel, whose conservatives are in talks to form a new centre-right government with the pro-business Free Democrats (FDP), also told the meeting she wanted to pass "a law to accelerate economic growth" very quickly, the participants said, without detailing what such a law might embrace.

In order to keep social security contributions stable, additional outlays for tackling the crisis are due to be financed via a special fund, they added. Passing a supplementary budget for 2009 could be an option for this, they noted.

Germany exited its sharpest postwar recession in the second quarter, growing 0.3 percent from the previous three month period, partly thanks to government stimulus measures.

The Bundesbank has forecast Europe's largest economy probably grew a further 0.75 percent in the third quarter, though a number of leading analysts have said there is a risk negative growth could return in the months ahead.

On Monday, senior officials said conservatives and the FDP will pursue modest tax relief for companies next year and broader income tax cuts from 2011.

The extent of the tax relief is not yet clear, though talks are now focusing on figure of some 20 to 25 billion euros -- below FDP proposals for cuts worth 35 billion euros.

Unemployment is expected to rise more sharply in coming months, and senior German policy makers have said repeatedly the recovery is not yet self-supporting.

(Reporting by Andreas Moeser, writing by Dave Graham)

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