The VCI also said that for western Europe as a whole, chemicals output was expected to grow at a significantly slower pace in 1998 than in 1997. "Indications of an economic cooling off in the US, the deterioration of the situation in Japan and the Asian crisis have doubtless dampened expectations for the second half of the year," the VCI said in a statement.

But it added that conditions for the German chemicals sector remained good due to the strong dollar, good growth prospects for western Europe and an "exceptionally dynamic" development among industrial chemicals clients.

The association also said there were signs that some customer industries had started to stock up their supplies. "Chemicals production will therefore probably be above theyear-earlier level in 1998," the VCI said.

The VCI said growth in the chemicals industry ceased in the second quarter of 1998 but that firms were operating close to full capacity.

The VCI said it estimated chemicals output grew by between two and three percent in the first five months and that government statistics showing a 1.7 percent rise in that period understated the true level of output.

Producers of basic chemicals increased output by one per cent while the development in the consumer-oriented chemicals business, excluding the drugs sector, was "modest", the VCI said.

By contrast, producers of industrial chemicals such as plastics, fibres and paints increased output by 4.6 per cent, benefiting from a 7.6 per cent rise in German manufacturing output in the first five months of 1998.

Referring to the western European chemicals sector, the VCI said prospects remained good but that export growth in 1998 will be slower than 1997 because exports this year have not had the positive effect of thedollars appreciation in 1997.

In addition, economic growth in North and Latin America was weakening and the Asian crisis was dampening export demand, the VCI said.