Weak German growth casts shadow over eurozone crisis

16th August 2011, Comments 0 comments

Meagre German growth figures Tuesday looked likely to further dampen Berlin's desire to do its all to rescue stricken eurozone members as Chancellor Angela Merkel headed to Paris for crisis talks.

The eurozone's top economy reported a disappointing 0.1-percent expansion in gross national product in the second quarter and slower first-quarter expansion than initially reported, raising fears it is losing momentum.

Analysts polled by Dow Jones Newswires had forecast 0.4 percent growth for the second quarter as all eyes look to Germany to help resolve the crippling European debt crisis.

"The dynamism in the German economy has cooled significantly since the robust start to the year," the federal statistics office (Destatis) said in a statement.

It revised the first-quarter growth figure down to 1.3 percent from the 1.5 percent originally reported.

Destatis said the 0.1-percent growth in the second quarter compared to the first quarter was based on only anaemic expansion in exports, the backbone of the German economy. Neighbouring France posted zero growth in the same period.

German imports rose in the second quarter more than exports, undermining the growth figures, as consumer spending and investment in construction also slipped.

The figures were stronger in a year-on-year comparison, with gross domestic product rising 2.8 percent in the second quarter.

Merkel, who is to huddle with French President Nicolas Sarkozy later Tuesday in Paris, said last month she expected German growth to reach a similar level this year to the rate in 2010, when it hit 3.6 percent.

The Bundesbank central bank has forecast 3.1 percent expansion this year while the International Monetary Fund expects 3.2 percent growth.

The government's official forecast, reported in April, remains at 2.6 percent but economic data since then had made that prediction seem timid.

Analyst Carsten Brzeski of ING Bank said the end, at least for now, of the German economy's breakneck growth streak would shape the debate over Berlin's role in helping to rescue stricken eurozone countries.

"The speed of the recovery is slowing and the economy has returned to normality," he said.

"While German politicians are currently racking their brains on the pros and cons of common eurobonds, the luxury of having an economy running at 'wonder' speed is fading."

The idea of eurobonds issued and guaranteed by countries with better credit ratings has long been floated as a way of helping struggling eurozone members.

Germany, already the paymaster for an existing rescue fund, is opposed to eurobonds as it believes they would increase its own borrowing costs and allow countries to duck badly needed reforms.

Merkel and Sarkozy said they would discuss how to improve the eurozone's governance and coordination of economic policy in their meeting Tuesday but ruled out a discussion of eurobonds.

Chris Williamson, chief economist at financial information services company Markit, said the shaky performance of both Germany and France "raises concerns that the euro area's hitherto strong core countries are undergoing a much deeper than previously thought soft-patch."

But the DIW economic institute said German industry had a positive outlook which would ensure continued growth if not a lasting boom.

The quarterly growth report "puts a damper on things but does not mean an end to the recovery," DIW's Ferdinand Fichtner said.

Christian Ott, a eurozone economist at Natixis, said exports would likely continue to suffer in the second half due to weak global demand.

"However, with GDP growth in the range of three percent for 2011, Germany is still outperforming the eurozone considerably," he said.

© 2011 AFP

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