Germany's election has turned into a cliffhanger whose result is too close to call but any post-poll celebrations by the eventual victors will prove brief as the country's economic problems loom large.

Ahead of tomorrow's election, Chancellor Gerhard Schroeder's coalition of Social Democrats and Greens has clung doggedly to growth forecasts underpinning its budgetary plans but these look set to be jettisoned quickly no matter which party wins.

In a rare demonstration of pre-electoral candour, Germany's economy ministry said in a report that data so far this year do not support the government's assumption that growth will be "around 0.75 per cent" in 2002.

And in a rare slip, Schroeder also suggested last week that two per cent growth may have to be the new benchmark for 2003, although his spokesman later insisted this was not a correction of the government's official forecast of "around 2.5 per cent".

Analysts expect any new government will be forced to cut the forecasts by November, when new tax revenue estimates are drawn up, and have not waited to scale back their own projections.

Germany's six leading economic think tanks, which take part in the tax revenue talks, are due to publish their new joint forecasts on October 22.

Most now expect growth in Europe's largest economy this year of 0.6 per cent at most, and around two per cent in 2003. That is not enough to stop unemployment from rising over the winter and not enough to fund current budget plans.

Germany has underperformed its European Union peers on growth for a decade.

But a mild recession last year, from which the country is struggling to escape, was the first since the launch of the euro in 1999 and has highlighted the disadvantages of Europe's "one size fits all" monetary policy and associated budgetary rules.

Many argue European Central Bank rates would have to be substantially lower than the current 3.25 per cent to suit the German economy.

In an analysis published in May, the EU executive said Germany's poor growth record could be explained, in roughly equal measure, by a shrinking construction sector, high taxes to pay for the 1990 reunification and a rigid labour market.

The study was published before floods swept through in August. Ironically, they should boost the overall economy in 2003 because of massive reconstruction work.

Many statistics will also be rebased next year to 2000 from 1995, meaning the construction sector's weight in indicators will also shrink.

But the study concluded: "Without a new round of labour market reforms the German medium term growth outlook is likely to remain bleak."

Analysts agree that in the absence of a strong world economy and no control over the monetary side, Germany's only hope to boost growth is through strengthening domestic demand and its economy's potential to grow in the future.

But with little room to raise spending because of the EU's three percent of gross domestic product cap on budget deficits and with all major parties offering only mild reform policies there is little hope of a quick fix.

"The two camps are almost identical twins," said Adolf Rosenstock of Nomura Research. "That's why I think the election is such a non-event for the economy and markets... There would be slow grinding reforms, whichever side wins, with slightly different touches... but the outcome will probably be the same."

Most analysts say a conservative/liberal coalition would offer a better chance of medium-term reform, partly due to their policies but also because they currently control Germany's upper house of parliament.

But the short-term impact of a conservative-led government could be negative, due to doubts about its commitment to EU budgetary rules and the three percent budget deficit ceiling.

"We have to recognise that the CDU/CSU is looking for less restrictive fiscal policy, which would have a negative impact on fixed income markets because it would look more likely that Germany breaches the (EU's) three percent limit," said Juergen Michels of Salomon Smith Barney in London.

Michels said he expected Germany's budget deficit to rise in any case to 3.3 per cent of GDP this year and that 2003 was the real challenge.

"If we get really restrictive policies then we have a problem with euro zone growth. Nobody wants this and I hope there will be an agreement (among EU policymakers) to handle this situation in Germany," he said.

If other countries followed Germany's lead in boosting their budget deficits the euro would suffer, he added.