German economy falls into recession

[November 13, 2008]  BERLIN (AP) -- The German economy, Europe's biggest, tipped into recession in the third quarter as weakening exports fueled a bigger-than-expected fall in national output, government figures showed Thursday.

Gross domestic product contracted by 0.5 percent in the July-September period compared with the previous quarter, the Federal Statistical Office said -- a much sharper fall than the roughly 0.2 percent decline economists had expected.

That followed a 0.4 percent fall in GDP in the second quarter, which was the first decline since late 2004, and a 1.4 percent growth rate in the first quarter.

A technical recession is defined as two consecutive quarters of negative growth.

The statistical office said a slight increase in consumer and government spending in the third quarter, during which the global financial crisis gathered pace, was offset by falling exports and a large increase in imports.

Exports are a mainstay of the German economy and largely powered its stronger performance over recent years.

Holger Schmieding, chief European economist at Bank of America, said the third-quarter economic decline may be "just the beginning."

"Late 2008 and early 2009 could well be worse," he said. "Germany -- and the euro zone -- have to get ready for a serious recession."

Economists said the bigger-than-expected fall was partly explained by upward revisions to the first- and second-quarter figures -- previously reported as a 1.3 percent rise and 0.5 percent decline.

In addition, the euro reached record levels against the U.S. dollar during the quarter and oil prices hit all-time highs. Both have since retreated.

Still, Thursday's figures pointed to more trouble ahead. Schmieding forecast that the German economy would shrink by 0.6 percent in both the current quarter and next year's first quarter.

Timo Klein, an economist at IHS Global Insight in Frankfurt, said that "net exports will stay on a weakening trend for most of 2009, due to faltering euro zone and indeed global demand."

The euro's decline against the dollar "will offset this only partially, as the pace of growth in foreign countries is a much more important variable for German exports than the exchange rate," he added.

Klein said declining oil prices and inflation could support private consumption, but fears over jobs could hold back consumer spending.

The government is predicting growth of 1.7 percent for the whole of 2008, but forecasts the economy will slow to 0.2 percent next year.

On Wednesday, its independent panel of economic advisers offered a gloomier outlook, forecasting zero growth in 2009.

In an effort to reduce the impact of the economic crisis, the government is pushing through a stimulus package ranging from tax breaks on new cars to credit assistance for companies. It is aimed at triggering investments of up to 50 billion euros ($63 billion).

[Associated Press; By GEIR MOULSON]

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