Germany in recession

Bloomberg

The German economy, Europe's largest, contracted more than economists expected in the third quarter, confirming it has entered its worst recession in at least 12 years as the global financial crisis curbs exports.

Gross domestic product dropped a seasonally adjusted 0.5 percent from the second quarter, when it fell a revised 0.4 percent, the Federal Statistics Office said yesterday. The economy last contracted this much over two consecutive quarters - the technical definition of a recession - in 1996.

German companies are scaling back production as slower global growth erodes export demand. Siemens, Europe's largest engineering company, plans to cut 16,750 jobs by 2010 as profit declines. Germany's benchmark DAX Index has tumbled more than 40 percent this year, business confidence fell to a five-year low last month and manufacturing orders plunged in September.

"The German recession has begun in earnest and it's very serious," said Holger Schmieding, Chief European Economist at Bank of America in London. "It raises the risk of a German contraction of more than 1 percent next year and we will have to revise down our forecast for the euro area as well."

Eurostat, the European Union's statistics arm, will publish third-quarter growth data for the euro region today.

In the year, the economy grew 0.8 percent when adjusted for the number of working days, the statistics office said. The third-quarter slowdown was led by trade as exports weakened and imports rose. Consumer and government spending improved "slightly," the office said.

IMFpredicts contraction
Last week, the International Monetary Fund predicted economic contractions in the U.S., Japan and euro area next year, with Germany's economy forecast to shrink 0.8 percent. The European Commission said on Nov. 3 that the 15-nation euro region is probably already in a recession. Just over 40 percent of German exports go to other euro-area nations.

Households may spend less and save more as companies retrench. Continental, which makes auto parts, plans to jettison 5,000 temporary workers and extend holiday production breaks. General Motors Corp.'s Adam Opel brand closed plants in Eisenach and Bochum for three and two weeks respectively to reduce production, forcing workers to take a vacation.

"The shock waves pushed out by the financial crisis have hit Germany full on, if later" than other countries, the government's five independent economic advisers said Wednesday. They called on Chancellor Angela Merkel to expand a 50 billion-euro ($63 billion) fiscal stimulus package to help revive growth.

Ralph Solveen, an economist at Commerzbank in Frankfurt, expects a "marginal" recovery in the second half of next year. "The German economy would have cooled regardless of the financial crisis, which just gave it the final push into recession," he said. "The factors that slowed German growth earlier this year such as high inflation, a strong euro and tight monetary policy are all disappearing, which should feed through to the economy next year."

Biggest sell-off in 70 years
The turmoil that began with the U.S. housing slump drove Lehman Brothers Holdings Inc. into bankruptcy in September and caused the biggest global stock sell-off in 70 years. The world's largest financial companies have posted almost $1 trillion in write downs since the start of last year, when the collapse of the U.S. subprime mortgage market triggered a credit shortage.

Investors expect the European Central Bank to lower its benchmark rate by at least half a percentage point at its next meeting on Dec. 4. That would be the sharpest rate reduction in the bank's 10-year history after its two half-point cuts in the past month to 3.25 percent.

Germany still faces "a long, drawn-out recession," said Stefan Bielmeier, an economist at Deutsche Bank in Frankfurt, who forecasts the economy will shrink 1.5 percent next year, the most since the aftermath of World War II. "Unfortunately, we don't see any respite any time soon. Where should the growth come from?"