Germany May Be on Brink of Recession


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 percent in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said today 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 percent 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.”

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Growth slowed to 3 percent in 2011 from 3.7 percent 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

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

The euro rose after the 2011 GDP report before giving up its gains to trade at $1.2755 at 11:50 a.m. in Frankfurt. European stocks fluctuated, with the Stoxx Europe 600 Index little changed. The MSCI Asia Pacific Index added 0.3 percent today, while Standard & Poor’s 500 Index futures gained less than 0.1 percent.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage point to growth last year, with exports up 8.2 percent and imports gaining 7.2 percent. In 2010, exports increased 13.7 percent.

“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.”

2012 Forecast

German growth will slow to 0.6 percent this year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19. The European Central Bank, which has cut interest rates to a record low and flooded the banking system with cash during the debt crisis, last month reduced its 2012 growth forecast for the 17-nation euro region to just 0.3 percent.

Spanish industrial production fell the most in two years in November reflecting a contraction in the euro area’s fourth- largest economy as the government prepares to implement a new wave of austerity. Output at factories, refineries and mines adjusted for the number of working days declined 7 percent from a year earlier, the most since October 2009, the National Statistics Institute in Madrid said today.

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Germany May Be on Brink of Recession

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