German economy falls into recession

Germany has fallen into recession as the global financial crisis crunches the world's third biggest economy.

Germany has fallen into recession for the first time in five years as the global financial crisis hammered the world's third biggest economy, official figures showed today. Europe's largest economy shrank 0.5 per cent in the third quarter, following a contraction of a revised 0.4 per cent in the second quarter, the Destatis statistics service said, meeting the technical definition for a recession - two consecutive quarters of shrinking economic activity.

The contraction was worse than expected, with analysts polled by Dow Jones Newswires predicting a 0.1 per cent fall compared to the previous three months. The Capital Economics research group said as the German data was published that the world economy was heading for the "worst recession since the 1930s". The third quarter figure "indicates a much weaker current situation of the economy than previously anticipated," said Ralph Solveen, a Commerzbank analyst.

Destatis said a major factor in the decline was that the world's leading exporter posted a net negative export figure as imports showed considerable gains. German economic activity had got off to a good start in 2008, expanding by 1.4 per cent in the three months to March. But the country has been hit by slumping activity in its major export markets while domestic consumption has remained at low levels. Corporate investment has suffered as well from a sharp decline in the business outlook.

In October, German business confidence hit its lowest point in more than five years, a widely-watched survey by the Ifo research institute showed. Industrial orders, a key leading indicator, plunged in September by eight per cent, the steepest drop since Germany was reunited in 1990. Berlin has cut its forecast for 2009 growth to just 0.2 per cent and yesterday a panel of experts advising the government said it expected a standstill next year.

Holger Schmieding, a Bank of America senior economist, warned that "late 2008 and early 2009 could well be worse. Germany - and the eurozone - have to get ready for a serious recession". The panel of economic experts yesterday dismissed the government's plans for a multi-billion-euro bundle of tax breaks and state investment aimed at stimulating growth as a "hotch-potch of isolated projects designed to give the impression that the government is doing something".

The experts called for more government spending to improve infrastructure and the educational system, even if it meant increasing the public debt. They also forecast that German unemployment would rise 1.1 percentage points next year. The panel said the package was far too small to have a real impact and was skewed toward specific industries such as automaking as a result of heavy lobbying. Commerzbank's Mr Solveen noted that a build-up in inventories signaled "a potential burden for the fourth quarter" of this year.

He said the economy would probably contract 0.75 per cent in the last three months of 2008 and he expected a "clear decline for 2009" as well. Several economists have forecast that the German economy could contract by around 0.7 per cent next year. Mr Solveen said the German recession represented a strong argument for further interest rate cuts by the European Central Bank. "We expect a further step by a half percentage point in December," he said.