German Economy Contracts For First Time In Almost 4 Years

(RTTNews) - The German economy shrank in the second quarter for the first time in almost four years on reduced investment in construction as well as machinery and equipment and a slump in household spending.

Tuesday, a detailed report from the Federal Statistical Office revealed that the largest eurozone economy contracted 0.5% sequentially in the second quarter, after expanding 1.3% in the first quarter. The last time the German economy recorded a decrease was in the third quarter of 2004. The second quarter was characterized by weakness in construction investment and household spending.

The gross fixed capital formation dropped 1.9% from the first quarter, which was mainly driven by a 3.5% decline in the construction sector. Capital formation in construction weakened after reporting a robust 5.7% increase in the first quarter. Further, the statistical office noted that capital formation in machinery and equipment dropped 0.5% from the prior quarter.

Final consumption expenditure of government grew 0.3% in the second quarter, while household expenditure fell 0.7%, resulting in a downward effect on growth.

Downward trends were noticed for both exports and imports. As imports dropped more than exports, with the resulting net exports contributing 0.4 percentage points to economic growth.

On a yearly basis, the economic growth stood at 3.1%, larger than the 1.8% in the first quarter. The calendar adjusted Gross Domestic Product, or GDP rose 1.7% compared with 2.6% in the prior quarter.

The latest report from the statistical office, thus, confirmed the preliminary growth estimates released on August 14.

According to the Federal Statistical Office, the economic performance was achieved by 40.2 million persons in employment, up 566,000 persons over the previous year. During the period, overall labour productivity increased 1.6%.

On the production front, economic growth was based on all economic sectors. High annual growth rates were recorded in industry and construction. The price-adjusted gross value added in trade, transport and communications and financial, renting and business activities also improved in the second quarter.

As regards the expenditure side of the gross domestic product, annual growth was based on domestic as well as foreign demand in the second quarter. Domestic uses, including final consumption expenditure and gross capital formation moved up 2.2% annually. This development was due to a strong 7.9% increase in gross fixed capital formation. Capital formation in construction rose markedly by 6.2% year-on-year.

Further, final government consumption expenditure grew 2% and household consumption remained stable. The net exports, which benefited from strong foreign demand contributed 1.1 percentage points to GDP growth.

Elsewhere, a monthly survey from the GfK Group showed that German consumer confidence, which was depressed by subdued economic outlook reached the weakest level since 2003. Consumer confidence for September dropped to 1.5 points from August’s 1.9 points.

According to a survey released by the Munich-based Ifo research institute, business confidence declined more than expected to a three-year low of 94.8 in August from 97.5 in July. The business climate dropped for the third straight month and the firms expect a further negative business development in the second half of the year.

Commenting on the latest German data, economist at BNP Paribas Frï¿½dï¿½rique Cerisier said in a note that going forward negative growth rates as large as that recorded in the second quarter are unlikely. According to the economist, the correction phase in the construction sector is already achieved. However, the economist noted that growth perspective for the end of the year seems extremely limited, considering the weakness of growth in rest of the European Union.

The Eurozone economy contracted for the first time since the launch of Euro nearly a decade ago. Flash estimates released by the Eurostat showed that gross domestic product or GDP contracted 0.2% in the second quarter from the first three months of the year. The 15-nation economy shrunk after growing 0.7% in the first quarter. This was also the first contraction since records began in 1995.

Preliminary data showed that major economies in the region contracted in the second quarter, indicating that some may struggle hard to avoid a recession during the rest of the year.

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