German growth slows, lending little euro support

German gross domestic product growth slowed more than expected in the second quarter, data showed, raising questions over how much drive can be expected from Europe's top economy in uncertain times.

Preliminary figures from the statistics office said growth dropped to 0.1 percent in seasonally adjusted terms, dragged on by a negative trade balance, flagging consumption and weak construction investment.

The office also revised growth in the first three months of the year down to 1.3 percent, leading some economists to cut their 2011 and 2012 forecasts.

"The second quarter marks a turning point in the German business cycle," said Unicredit analyst Andreas Rees, lowering his 2011 forecast to 3 percent from 3.5 percent, and his 2012 forecast to 1.25 from 2 percent.

"The period of exuberant growth is now behind us," he said.

The sluggish German growth contributed to a sharp euro zone slowdown, raising fears that a longer-term dip could derail efforts to resolve the bloc's debt crisis.

The Q2 reading, which compared with a Reuters consensus forecast for a 0.5 percent expansion, was the weakest since the first quarter of 2009, when Germany was at the end of its worst recession since World War II.

Quarterly growth had been initially reported at 1.5 percent for the first quarter. The statistics office said that data dating back to 1991 had been subjected to a wide-reaching revision conducted every five years.

The lower-than-expected figures rattled fragile financial markets ahead of a meeting later in the day between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris.

Germany, Europe's largest economy, has been a star performer in the industrialized world since the end of the 2008 financial crisis, and a sharp slowdown in German growth would have repercussions elsewhere in the euro zone.

"While German politicians are currently racking their brains on the pros and cons of common euro bonds, the luxury of having an economy running at "wonder" speed is fading away," said ING economist Carsten Brzeski.

Growth pause

Economists see momentum in international trade slowing in the months ahead, which could progressively erode growth in Germany's export-geared economy. Expectations for full-year growth of over 3 percent may now seem optimistic.

"We are far from nearing the end of the crisis," Christoph Schmidt, a member of Berlin's panel of economic advisers, told Reuters. "Germany cannot decouple from the rest of the world ... when the U.S. and Europe are in difficulty, we feel that. Emerging markets alone cannot completely fill that gap."

Forward-looking indicators have also been downbeat of late, as the escalation in debt crises in Europe and the United States stokes fears of the rich world sliding back into recession.

German business sentiment for example fell to a nine-month low in July, a key survey by the Ifo economics institute showed, while investor sentiment fell to its lowest in 2-1/2 years.

Germany's foreign trade association has also warned that any

U.S. recession could have dramatic consequences for Germany given its impact on emerging market trade partners.

"Supported by resilient domestic demand, Germany should then fare better during the current growth pause than other countries," said Christian Schulz from Berenberg. "If the U.S. were to fall into recession and with it other countries, the large, open German economy would be hit harder."

Conventional wisdom points to the German economy starting to feel the weight of the global slowdown by year-end, once the current pile of orders -- boosted in June by big-ticket sales of capital goods abroad -- has been worked off.

But orders data already points to a slowdown, as domestic orders for capital goods fell 15.1 percent in June and foreign and domestic orders for consumer goods also dipped.

Germany's largest steelmaker, ThyssenKrupp, confirmed a key full-year profit target last week after third-quarter earnings fell short of forecasts but admitted it saw increased uncertainty in U.S. markets.

Economists also say the global outlook and fears Germany will have to fund further bailouts were depressing already fragile consumer sentiment, which had been supporting an expansion in domestic consumption.

[Source: By Brian Rohan, Reuters, Berlin, 16Aug11]

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