Germany contracts in wake of euro crisis

GERMANY may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011.

Europe’s largest economy shrank “roughly” 0.25% in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said yesterday in an unofficial estimate.

Economists such as Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.

“If the euro crisis does not get worse, or is finally brought under control after another wave in early 2012, the German economy can rebound nicely from the summer onwards,” said Schulz, a senior economist with Berenberg in London. “However, we see a 25% chance of the euro crisis remaining out of control longer, or completely spiraling out of control with a series of sovereign and bank defaults. In such a scenario, Germany would enter a major recession.”

Growth slowed to 3% in 2011 from 3.7% in 2010, which was the most since German reunification two decades earlier, the statistics office said. The economy last contracted in 2009, when it was in the throes of the global financial crisis. Unemployment, at a two-decade low, may bolster growth this year by supporting consumer spending.

Domestic demand was the main contributor to GDP growth last year, adding 2.1 percentage points, the report showed. Private consumption increased 1.5% in the year, while government spending rose 1.2%. Investment in plant and machinery gained 8.3%.

The weaker global economy and waning demand from debt-stricken eurozone neighbours have eroded German foreign sales, the main pillar of its economic expansion.

Net trade contributed 0.8% to growth last year, with exports up 8.2% and imports gaining 7.2%. In 2010 exports increased 13.7%.

“All in all, the German economy has remained relatively resilient,” said Annalisa Piazza, an economist at Newedge Group in London. “Signs of moderation have recently emerged but we expect the German economy to remain afloat in the coming quarters, maintaining its role as the major engine of growth for the euro area.”

German growth will slow to 0.6% this year before recovering to 1.8% in 2013, the Bundesbank predicted on December 19.

— Bloomberg