The Rhineland-Westphalia Institute for Economic Research (RWI), a leading German economic research organization, said in a statement that Germany, Europe's largest economy, would see gross domestic product (GDP) shrink 2 percent next year.

In September, RWI had forecast growth of 0.7 percent in Germany for 2009, but downscaled this prediction after factoring in recent events in world-wide financial sectors.

"The reasoning is that the financial crisis is taking a wider toll on the economy than previously anticipated," the Essen-based group said.

Unemployment to rise

The institute said when compiling its September economic situation report for Germany, indicators had been pointing towards a calming of financial markets, but that this calming had not eventuated.

German exports are set to fall

RWI said German exports would clearly weaken in 2009, unemployment would increase and public revenue would drop.

The previous worst decline of the German economy came in 1975, when the oil crisis pushed GDP down 0.9 percent.

World Bank makes dire prediction

RWI's predictions echoed a World Bank report released Tuesday which significantly dimmed short-term economic prospects for developing countries and forecast the first contraction in world trade since 1982.

The bank's "Global Economic Prospects 2009" report predicted world GDP growth for 2008 would stand at around 2.5 percent, but would drop to 0.9 percent next year.

"The global economy (is) transitioning from a long period of strong developing-country led growth to one of great uncertainty as the financial crisis in developed countries has shaken markets worldwide," the report said.

Trade, exports down

Global trade will shrink 2.1 percent in 2009, RWI said

The bank said developing countries would likely grow by 4.5 percent next year, down from 7.9 percent in 2007, while growth in high-income countries like Germany would turn negative.

It also said world trade volumes were projected to contract 2.1 percent in 2009, causing a significant drop in exports.

"Given the expected decline in global trade, both developed and developing countries need to resist the temptation to resort to protectionism, which would only prolong and deepen the crisis," said Uri Dadush, Director of the World Bank's Development Prospects Group.