German Economy Contracts in 4Q

Politics Reuters

Germany showed first signs of feeling the pain from the euro zone's debt crisis as the economy shrank in the last three month of 2011, despite outperforming its peers for main part of the year thanks to strong domestic demand and exports.

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Gross domestic product (GDP) grew 3.0 percent in 2011, preliminary Federal Statistics Office data showed on Wednesday, below the previous year's growth rate of 3.7 percent -- the fastest since reunification -- and in line with a Reuters poll estimate.

But GDP contracted by around 0.25 percent in the fourth quarter of 2011, an official from the Statistics Office added.

"Germany cannot isolate itself so easily from tensions within the euro zone. In addition the export sector is facing a difficult period given the fall in global demand," said Joerg Zeuner, chief economist at VP Bank.

"Another quarter of contraction and thereby a technical recession are distinctly possible. However if there is no further escalation in the euro zone debt crisis the German economy should still grow in 2012, albeit at a moderate 0.5 percent," he added.

Germany's export-driven economy recovered quickly from the 2008/09 financial crisis, but began to feel the pinch late last year as the debt crisis spread from Greece to its key trading partners in the euro zone and weighed on the real economy.

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Germany earns 28 percent of its GDP by exporting goods to EU countries and Switzerland, but only 2.5 percent in exports to China, Berenberg Bank pointed out.

Forward-looking orders data released on Friday also signalled a slump ahead, with orders falling at the fastest pace since the height of the financial crisis nearly three years ago as demand from outside the euro zone plummeted.

Many economists have cut their 2012 growth forecasts. The Bundesbank expects growth of 0.6 percent this year, less than the government's official forecast of 1.0 percent, while think tank IMK has even predicted a mild recession.

DEMAND FOR CARS DRIVES 2011 GROWTH

Roderich Egeler, head of the statistics office, said that Germany managed to continue its stellar recovery from the financial crisis last year, particularly due to strong demand at home.

"The economic recovery took place primarily in the first half of the year," Egeler, the head of the statistics office, told a news conference. "2011 saw strong private consumption," he added.

He added that demand for cars had been specifically strong.

German car sales rose 6.1 percent in December and Germany's Volkswagen and BMW retained leadership in their home market in 2011.

Private consumption grew 1.5 percent last year compared with 0.6 percent in 2010. This development was helped by a further fall in German unemployment.

The country's jobless rate fell in December to the lowest level since reunification two decades ago, while surveys showed new orders and jobs growth in the services industries helped its private sector to expand.

Most analysts expect that Germany will be able to rebound swiftly from any weakness in the winter months as employment levels remain at high and paltry interest rates persuade consumers to spend rather than save.

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