Germany in recession as Eurozone stagnates

Source: Reuters

The German economy saw a second successive quarter of negative growth in the three months to the end of June, confirming that the strong euro, industrial action and weak domestic demand combined to tip the eurozone's largest economy into technical recession in the first half of this year.

Meanwhile official data showed that the eurozone economy failed to register any growth between the first and second quarters of the year, compared with quarter-on-quarter growth of 0.1 per cent in the first three months of the year. Similarly, the wider EU economy also stagnated during the second quarter following 0.1 per cent quarterly growth in the first three months of the year.

The German figures, showing the economy shrank 0.1 per cent from the first quarter, were not totally unexpected, though most analysts had forecast a flat reading. Psychologically, however, the reading is disappointing, as it confirms that Germany is actually in, rather than merely flirting with, recession.

GDP had contracted by 0.2 per cent in the first quarter, so the second quarter figures mean this is the second time in two years that Germany has entered recession - defined as two successive quarters of contraction.

The figures also further undermine any prospects that Germany's economy will grow by anywhere near the already meagre 0.75 per cent projected by the government for this year.

However, a succession of economic indicators out since the end of July indicate that the low point may have been passed at the mid-year, with a slow recovery getting under way in the third quarter, and picking up speed in the fourth.

Retailers and car manufacturers, for instance, have within the last week reported a gradual pick-up in demand, helped by the government's clearer determination to push ahead with much-needed structural reforms and to bring forward tax cuts in an effort to stimulate the economy.

Their observations have been backed up by a batch of leading indicators for July, notably the Ifo business climate, purchasing managers' indices and the GfK consumer sentiment indicator.

Industry associations and economists alike all caution that recovery remains at a very early stage and is much more muted than in the US and Japan, unlikely to produce any tangible improvements until much later in the year. It is also not expected to feed through to the jobs market, where the unemployment rate stands at above 10 per cent, before next year.

Despite the recent slight brightening of a gloomy picture, few economists expect the German economy to manage anything more than 0.2 per cent growth at best for the full year. Growth could pick up to about 1.7 per cent in 2004 according to some of the more upbeat forecasts.

But that would still be below the 2 per cent that the government says is needed to keep the budget deficit below the 3 per cent ceiling set by the European Union's stability and growth pact.

Any pick-up also remains susceptible to developments in the currency markets, where the euro has appreciated some 20 per cent against the US dollar since the start of the year.