German economy contracts unexpectedly in second quarter

Thursday 14 August 2014 15.46
German economy contracts by 0.2% in the second quarter
German economy contracts by 0.2% in the second quarter

The German economy suffered a surprise contraction in the second quarter, its first in more than a year.

The contraction has raised new doubts about Europe's recovery after data showed Italy sliding back into recession and French economic activity stagnating. 

Foreign trade, which has traditionally been a driver of German growth, and investment, particularly in the construction sector, were to blame for the 0.2% decline in gross domestic product, the Federal Statistics Office said. 

Economists had been expecting the economy to stagnate in the quarter after the first three months of the year were boosted by mild winter weather. 

Last week, Italy reported a 0.2% drop in second quarter GDP. The French economy stagnated in the quarter, data released this morning showed, prompting Finance Minister Michel Sapin to acknowledge that the country would miss its publicdeficit target this year. 

In Germany, domestic demand was the only bright spot in the quarter. Public consumption rose slightly and consumers,  benefitting from a strong labour market, rising wages and low inflation, splashed out more cash, the Statistics Office said. 

But the Office said it had revised down the first quarter growth figure to 0.7%, from a previously reported expansion of 0.8%. 

The German economy proved a bastion of strength throughout much of the euro zone crisis but it slowed towards the end of 2012 and had a subdued year in 2013. 

The government is, however, expecting growth to pick up to 1.8% this year - more than four times faster than last year. 

Other recent data has disappointed, with industrial orders suffering their sharpest fall in nearly three years, and output and exports rising only modestly while investor and business morale has darkened as the Ukraine crisis takes its toll.

Several German companies, including consumer goods group Henkel, optical systems maker Jenoptik and generic drugmaker Stada, have complained about the crisis hitting business in recent weeks.

Meanwhile, euro zone economic growth ground to a halt in the second quarter. The zero growth reported by statistics agency Eurostat today was cause for alarm throughout the euro zone, which is already bracing for the impact of sanctions imposed on and by Russia over Ukraine.