Future looks grim for Europe's economic engine
Germany’s economy collapsed near the end of 2008 and more bad news is yet to come, say analysts.
Frankfurt -- The future bodes ill for European economic powerhouse Germany, slammed by a disastrous outlook for economic growth in 2009 and news its largest bank, Deutsche Bank, suffered a massive fourth quarter loss.
The world's leading exporter fell into recession in 2008 and an official estimated Wednesday that output contracted by another 1.5-2 percent in the last three months of the year.
That would be the worst result in 21 years and would put the country on track for a record economic slump this year.
Germany's dire economic straits were underscored when Deutsche Bank, the country's leading lender, said it expected to incur a massive loss of nearly 5 billion euros in the fourth quarter after market conditions "severely impacted" its sales and trading operations.
The bank's net loss of 4.8 billion euros (6.4 billion dollars) over the final three months would result in an annual loss of around 3.9 billion euros, its first annual loss since the bank was reformed in 1956.
Looking ahead, the collapse in German output "means the starting point for 2009 is very bad," said Commerbank's chief economist Joerg Kraemer.
He expected gross domestic product (GDP) "to shrink by 2.0 to 3.0 percent in 2009, which would be the sharpest decline in the history of the Germany."
Chancellor Angela Merkel told the Bundestag, the lower house of parliament, that "Germany is witnessing its worst economic period in decades."
"It is a situation in which economic textbooks serve no purpose," she said.
The national statistics office Destatis said the economy had grown by 1.3 percent for all of 2008, nearly half the 2007 figure, as expansion of mainstay exports was also cut nearly in half.
Consumption stagnated in large part owing to high energy prices half way through the year, and growth of business investment also began to weaken.
Much now rides on a government economic stimulus plan worth about 50 billion euros.
The plan was approved by Merkel's cabinet on Monday and includes heavy spending on infrastructure such as roads and schools along with cuts in taxes and payroll deductions.
Germany's Institute for Employment Research said the stimulus package could save a quarter of a million jobs, but others, including business leaders, remained sceptical.
The financial sector was shocked meanwhile by the news from Deutsche Bank as it pursued its takeover of Postbank, owner of Germany's biggest retail banking network.
Deutsche Bank's results reflected "exceptional market conditions, which severely impacted results in the sales and trading businesses," it said in a statement.
Bank chairman Josef Ackermann told a telephone news conference he would not ask the government for available state aid, adding: "I never asked for anything for Deutsche Bank. There is absolutely nothing that Deutsche Bank needs."
A separate bank statement said it had agreed to a new, and complex, three-step approach to buying Postbank from the logistics group Deutsche Post, which would entail the latter holding a Deutsche Bank stake of 8 percent.
That means that the government, which has an indirect holding in Deutsche Post, would nonetheless enter the capital of the country's biggest bank.
On Thursday, Berlin said it would take a stake of 25 percent plus one share in the second biggest bank, Commerzbank, to boost its finances and allow it to ensure a smooth takeover of another troubled bank, Dresdner Bank.
The government was also considering partially nationalising distressed mortgage lender Hypo Real Estate (HRE), a spokesman for Merkel's CDU party told AFP.
"I can confirm there is some thought in this direction," Otto Berhnardt, CDU (Christian Democratic Union) spokesman for financial affairs, said, adding that a decision could be make quickly.
The government is thus becoming the main actor in a volatile banking sector that helped pushed the Frankfurt DAX stock index down by more than 5 percent in afternoon trading on Wednesday.
But the dismal news raised the chances of a serious interest rate cut by the European Central Bank on Thursday.
"For the sake of its own credibility, the ECB cannot stay on hold at 2.5 percent or deliver a cosmetic 25 basis point easing," when bank governors gather in Frankfurt, Bank of America senior economist Holger Schmieding said.