German deficit falls despite fourth-quarter slump Adds: details, background

Feb 24, 2012, 9:18 GMT

Berlin - Germany's budget deficit fell to 1 per cent of gross domestic product (GDP) last year, despite a fall in exports resulting in Europe's biggest economy contracting in the final quarter, the statistics office said Friday.

Confirming preliminary data released last week, the statistics office said the nation's economy shrunk by 0.2 per cent in the fourth quarter after expanding by 0.6 per cent in the third quarter.

'The German economy suffered a minor setback towards the end of 2011,' the statistics office said. The fourth-quarter slump represented the country's first economic contraction since the recession of 2009.

But for the full-year 2011, the economy expanded by 3 per cent as stronger business conditions and rising tax revenues helped the country to cut its budget deficit after two years of breaching the 3-per-cent target set for euro member states. The German deficit stood at 4.3 per cent in 2010.

The confirmation of the improvement in Germany's public deficit stands in stark contrast to other parts of the 17-member eurozone where governments have launched a tough round of austerity measures in a bid to cut back high deficit-and-debt levels.

The solid state of Germany's public finances is likely to add to the pressure on Berlin to abandon its opposition to expanding the eurozone's bailout fund to help the so-called firewall to contain the region's debt crisis.

Germany is now essentially isolated in its opposition to bolstering the new European Stability Mechanism (ESM) with calls from across Europe and major international institutions to boost the ESM's planned 500-billion-euro fund (668.6 billion dollars). The ESM is due to begin operating in July.

The moves across the eurozone to bring their debt and deficits back into line with the currency bloc's strict fiscal rules are likely to push the currency bloc into a mild recession this year, the European Commission forecast on Wednesday.

But while the commission sees the eurozone slumping by 0.3 per cent this year, it expects Germany along with France to buck the trend.

After slumping as 2011 came to an end, the commission expects the German economy to pick up speed again as 2012 unfolds and to expand by a modest 0.6 per cent. As a result, avoiding the recession engulfing a large number of its eurozone partners.

While private consumption in the country slipped by 0.2 per cent quarter on quarter, imports fell by 0.3 per cent and exports slumped by 0.8 per cent as the economies in Germany's main trading partners in the eurozone came under pressure, the statistics said in its detailed breakdown of the GDP figures. The contribution to GDP from net trade fell by 0.3 per cent.

Helping to underpin the economy during the fourth quarter was a 1.1-per-cent gain in investment in plant and machinery. Investment in the building sector rose by 1.9 per cent. Domestic demand grew by a mere 0.1 per cent.

Still, signs have emerged that the nation has already started to shake off the fourth-quarter slump with economists describing it as representing merely a pause in economic growth.

'The outlook for the German economy improved perceptibly,' the nation's central bank, the Bundesbank, said in its monthly bulletin released on Monday, despite warning about the ongoing risks from Europe's debt crisis.

'In the first quarter of 2012, external factors will continue to weigh on production. From the second quarter onwards, positive cyclical factors could gain the upper hand,' the Frankfurt-based Bundesbank said.

Underscoring the optimism about Germany's economic outlook, a survey released Wednesday showed business confidence in the nation hitting a seven-month high this month.

The Munich-based Ifo institute said closely watched business climate survey rose for the fourth consecutive month in February to reach a more-than-forecast 109.6 points.