German economy slumps into recession (Roundup)

Nov 13, 2008, 11:35 GMT

A display indicates the German stock index DAX plunging at Frankfurt Stock Exchange in Frankfurt Main, Germany, 24 October 2008. EPA/FRANK RUMPENHORST

Berlin - Germany slumped into a recession for the first time in five years, official data released Thursday showed, amid signs that a global economic downturn was taking hold.

Europe's biggest economy shrank by 0.5 per cent in the third quarter of 2008, after it contracted 0.4 per cent in the three months to the end of June, the Federal Statistics Office said.

As a result, Germany will fulfil the technical definition of recession, after clocking up two consecutive quarters of falling gross domestic product (GDP).

The third quarter decline, more than the 0.1 per cent analysts expected, came after a strong euro and rising oil prices slowed growth.

'A negative effect on gross domestic product resulted from foreign trade, with a strong increase in imports and weakening exports,' the statistics office said.

The last time the country's economy was in recession was the first half of 2003.

'It has finally become clear that Germany is in recession. This will continue until the middle of next year,' the economic research unit of Commerzbank said. 'The German economy will contract considerably in the coming year.'

Germany's blue chip DAX opened 0.7 per cent lower but then recovered at mid-day to reach 4,642, a gain of 0.5 per cent.

The economy has been in a tailspin for months, following the heady days of growth in 2006 and 2007 when a GDP of more than 2 per cent helped Germany reclaim its position as Europe's economic locomotive.

Last week, the economics ministry said factory orders plummeted in September by 8 per cent, their biggest drop since records began about 17 years ago, while industrial production sank 3.6 per cent in the same month.

In their annual report presented to Chancellor Angela Merkel in Berlin on Wednesday, the German government's panel of economic advisors predicted 2009 would be a year of recession.

The experts said that exports, the mainstay of the German economy, will drop sharply in the coming year as the world economy slows, and urged the government to take countermeasures.

A 12-billion-euro economic-stimulus package announced by Merkel earlier this month won approval from almost all pro-government legislators Thursday.

The government says the package, which includes soft loans for medium-sized industry and for home insulation as well as a tax rebate for purchasers of new cars, will stimulate 50 billion euros in spending in Germany.

The Organization for Economic Cooperation and Development (OECD) predicted Thursday that economic activity in the eurozone will decline by 0.5 per cent next year.

'There will be gradual recovery starting in the second half of 2009,' but economic growth will not approach normal until the second half of 2010, OECD director of policy studies, Jorgen Elmeskov, said in Paris.

Data to be published on Friday is also predicted to show France - the 15-member eurozone's second biggest economy - also slipped into recession during the third quarter.

With the euro area's two largest economies in recession, the European Central Bank is likely to face mounting pressure to follow up this month's 50-basis-points cut with another hefty reduction in borrowing costs in December.