Thursday 18 December 2014

Weak investment, trade drive second quarter contraction in German economy

Published 01/09/2014 | 09:08

ECB President Mario Draghi Announces Interest Rate Decision...Pedestrians pass a euro sign sculpture outside the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on Wednesday, March 5, 2014. A month after saying he needs more data to make a decision, stronger-than-expected output and inflation and rising economic confidence might spare the European Central Bank president for now from radical steps such as negative rates. Photographer: Ralph Orlowski/Bloomberg...I
The Euro sculpture outside ECB headquarters in Frankfurt.

Weak investment spending and slow trade led Germany to contract for the first time in over a year in the second quarter, data showed, suggesting Europe's largest economy is running out of steam just as the impact of the crisis in Ukraine starts to bite.

Germany's Federal Statistics Office has confirmed an earlier estimate showing a 0.2pc contraction in seasonally-adjusted gross domestic product (GDP) on the quarter.

The disappointing performance of an economy once considered the last bastion of growth in a sickly euro zone echoed the region's second and third largest economies, France and Italy, which respectively stagnated and fell back into recession over the same period.

"The second-quarter contraction was a reaction to the strong first quarter so I think we'll return to moderate positive growth in the third ... but there's no shortage of uncertainty factors at the moment," said Thilo Heidrich, an economist at Postbank, referring to the standoff between Moscow and the West over Ukraine and the crisis in Iraq.

Gross capital investment in Germany fell by 2.3pc and construction investment dropped by 4.2pc, in part due to a mild winter which boosted building activity in the first quarter.

Heidrich said a 0.4pc drop in plant and equipment spending could be partly due to the Ukraine crisis and sanctions against Russia.

Foreign trade, traditionally the driver of German economic growth, subtracted 0.2 percentage points from growth while private consumption and inventories made a positive contribution.

"The domestic economy will be responsible for growth this year and it's possible that exports will suffer a bit more due to the Ukraine crisis and trade sanctions," said Heidrich.

The finance ministry has partly blamed the second-quarter contraction on the Ukraine crisis and sanctions against Russia.

Economy Minister Sigmar Gabriel has said GDP will probably increase in the remainder of 2014.

But some economists expect the second-quarter weakness to carry through into the third quarter, with the Ifo institute estimating growth will be "close to zero" in the third quarter while the DIW institute has warned of the danger of recession.

Recent data has been mixed, with business and investor morale souring while industrial orders have tumbled and joblessness has risen. Exports and output have, however, risen modestly.

Reuters

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