German economy shrank in Q4 in face of euro crisis

Last Updated: Tue, Jan 15, 2013 19:30 hrs

Germany's economy has fallen victim to economic problems hitting the rest of the eurozone and shrank in the fourth quarter of 2012, preliminary government figures show.

According to government figures released Tuesday, the German economy grew by a modest 0.7 percent in 2012 — well below the 3 percent growth seen in 2011 and suggests the economy contracted in the last three months of the year. The German government said that shrinkage could be around 0.5 percent.

Germany has so far avoided the fate of seven of its fellow members of the group of 17 European Union countries that use the euro and avoided a recession. This has been down to the country's strong export-led economy. However, the economy of the eurozone as a whole as fallen into a recession and demand for German exports from struggling countries such as Spain, Portugal and Greece has dropped as a result. Meanwhile, Germany's industries have cut back on investment.

Analyst Carsten Brzeski at ING bank estimated that the numbers showed the German economy shrank around 0.3-0.4 percent in the last three months of 2012. A 0.4 percent contraction amounts to an annualized drop of roughly 1.6 percent.

Economic growth was 0.8 percent in the first quarter, 0.3 percent in the second and 0.2 percent in the third. Due to a methodological quirk, German state statistics agency releases annual growth figures before it issues official fourth-quarter numbers, which will be announced next month.

Germany's economy had been widely forecast to contract in the final quarter of 2012 but analysts remain optimistic that it will recover and escape recession, defined as two consecutive quarters of negative growth. The country's Bundesbank central bank has said it does not expect that to happen even though growth for all of next year should come in at an anemic 0.4 percent.

Analyst Rainer Sartoris at HSBC said that domestic demand remained a drag on the economy because businesses were not investing in new plants, buildings and equipment even as consumers were willing to spend money. Wages grew 3.6 percent last year, the third strong increase in a row.

The recent easing of financial market turmoil from the eurozone crisis over too much government debt in some countries could help motivate businesses to spend more in investment.

"After growing relatively healthy at the start of 2012, the economy has entered into a weak spot at the end of the year," he said. "We expect the weakness to be relatively short-lived with respect to latest indications of a pick up of global economic activity."

Germany also said it had reached a balanced budget under the official EU debt criteria, turning in a small surplus for 2012 of 0.1 percent of annual economic output.

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