Euro-zone giant Germany shows the strain

The powerhouse of Europe has lost some of its drive as the euro crisis and world downturn took its toll last year.

The powerhouse of Europe has lost some of its drive as the euro crisis and world downturn took their toll last year.

German economic growth slowed over the year as the sovereign debt crisis and weaker global growth damped exports and company investment.

GDP increased just 0.7 per cent from 2011, when it gained 3 per cent, the Federal Statistics Office in Wiesbaden said yesterday. Economists forecast growth of 0.8 per cent, according to the median of 28 estimates in a Bloomberg News survey. Germany's budget surplus amounted to 0.1 per cent of GDP.

The euro zone, Germany's largest export market, fell into recession last year as countries from Greece to Spain cut spending to rein in deficits and weaker growth in the United States and China curbed global trade. The latest data suggest confidence is improving, and Mario Draghi, the European Central Bank president, last week expressed optimism that the 17-nation euro economy will return to health later this year.

"Considering the environment in which the German economy had to operate, it has done remarkably well," said Andreas Scheuerle, an economist at Dekabank in Frankfurt. "2012 was a year of caution and uncertainty. It looks like that's subsiding now. If it does, we're in for a considerable economic recovery later this year."

Company investment in plant and machinery dropped 4.4 per cent last year, the statistics office said.

Export growth slowed to 4.1 per cent from 7.8 per cent in 2011.

The ECB kept interest rates unchanged last week. While risks to the economic outlook remain skewed to the downside, Mr Draghi said signs for "positive contagion" are emerging that could help foster a "gradual recovery" in the euro zone later in the year.

German business confidence rose for a second month in December, unemployment held close to a two-decade low and industrial production and retail sales increased in November. Financial markets also recovered at the end of last year, with the benchmark DAX index gaining 11.5 per cent since mid-November.

Continental, Europe's second-largest maker of car parts, said on Monday sales and profitability growth may slow this year as demand within the region falters. The company has nevertheless mitigated the effects of the debt crisis by following Volkswagen and other German car makers into growing markets.

"Germany is a very competitive economy and in a position to exploit improvements in the US and China," said Anatoli Annenkov, an economist at Société Générale in London. "Growth won't be strong at the beginning of the year but it will be decent."

Elsewhere in Europe, David Cameron, the UK prime minister, yesterday announced he would set out how he plans to renegotiate Britain's membership of the European Union, and then persuade voters to back his position in a referendum, in a speech in the Netherlands on Friday.

Mr Cameron wants Britain to reclaim unspecified powers from the EU, and he signalled his support yesterday for putting the result to a plebiscite after the 2015 general election, with the government arguing to stay in the EU. He dismissed as a "false choice" calls from members of his Conservative Party for an early vote on leaving the 27-nation bloc.

"The beating heart of Britain is, we know we need to be, in Europe because we are a trading nation," Mr Cameron told the UK broadcaster ITV.

"But we're not happy with every aspect at the moment - there's too much interference.

"People want that to be fixed, they want more of a say.

"We shouldn't be frightened to involve the British people in that," he said.

* with Bloomberg News