The German Bundesbank has downgraded its growth forecast for 2003, in a move likely to create further embarrassment for the German government.

The Bundesbank revised its latest growth forecast for 2003 from 0.5 per cent down to 0.1-0.2 per cent. The revision puts further pressure on Chancellor Gerhard Schröder, who indicated last week that Germany might overshoot the 3 per cent budget deficit limit in 2004 for the third consecutive year.

In contrast to the revised growth forecast, Mr Schröder and Mr Hans Eichel, German finance minister, forecast growth of 0.75 per cent for 2003.

Mr Hermann Remsperger, the chief economist of the Bundesbank, said last month that the German central bank was poised to cut its previous 0.5 per cent forecast following weak growth for the first three months of this year. The IFW Institute in Kiel, one of Germany's six leading economic institutes, also set out a gloomy outlook, warning of stagnant growth in Germany - the euro-zone's biggest economy - and lack of economic growth for the country in 2003.

The chancellor has signalled his readiness to accept that Germany might overshoot the budget deficit limit set out in the EU stability and growth pact for a third consecutive year next year if it were necessary to boost growth and reduce near-record levels of unemployment. The revised forecast comes as the ECB publishes its reduced growth forecast for the euro-zone economies this week.