INTEREST rates could start falling as early as January, one international analyst predicted, as new data and surveys showed the eurozone's largest economy teetering on the brink of recession.

Business confidence in Germany is falling at an unprecedented rate according to the latest Ifo survey. The index for the overall business climate dropped to 94.8 in August -- its lowest level in over three years.

The speed of decline is even faster than the Ifo fall during the 2001 downturn.

Simon Barry, senior economist at Ulster Bank in Dublin, said: "Overall, the loss of momentum in the German economy is nothing short of startling.

"It is the fastest fall since the survey began in 1991. Only three months ago, the Ifo index was above its previous peak."

Jamie Dannhauser at Lombard Street Research in London said: "Business expectations of future activity appear to have been particularly badly hit in recent months, sliding to their lowest point since 1993."

The euro fell to a six-month low against the dollar after the figures. Analysts at Lehman Bros said the recent dollar is one of the strongest in the 35 years since the US currency was decoupled from gold. They predict early cuts in ECB interest rates and further gains from the dollar.

Lehman currency strategist Steven Englander said: "The ECB is going to start cutting early next year -- in January.

"Right now, the first ECB cut isn't priced in to the market until July. We are significantly more aggressive in terms of thinking how the ECB is going to respond to weaker growth and lower inflation.''

Problems

Simon Barry disagreed saying: "I think January might be a bit premature.

"The ECB still has big problems with inflation expectations, and 'second round effects' on wages are almost built into the pay bargaining of some EU countries.

"Markets are pricing in the first cut in rates from next May, which would be closer to our own view."

The German economy contracted in the second quarter. Detailed data yesterday revealed that growth in household consumption was negative for the third successive quarter.

"The ECB has made a rod for its own back in recent months," Mr Dannhauser said.

"Its forecasts are based on the premise that the eurozone economy is set to bottom out in the current quarter. This does not seem likely.

"Now Germany is looking sickly. The ECB view that the German and eurozone economies will bottom out this quarter appears misguided."

THE IRISH INDEPENDENT, Brendan Keenan