German economy powers on, French growth evaporates

(Reuters) – Germany’s economy confounded expectations by posting robust growth in the first quarter of the year while France could summon up none at all and Italy slid further into recession, data showed on Tuesday.

Gross domestic product in Germany, Europe’s biggest economy, rose by 0.5 percent on the quarter, bouncing back from a 0.2 percent slide in the last three months of 2011. France’s economy stagnated, although it grew slightly at the end of last year.

“This is a very strong comeback. The decline in the fourth quarter was not the start of a recession but just an economic dip,” Joerg Kraemer, economist at Commerzbank, said of the German figures.

“Germany is faring better than the rest of the euro zone. But I do not believe that it will continue at this speed.”

The yawning gap between Europe’s largest economy and its peers will fuel an austerity versus growth debate in the currency bloc as it teeters on the edge of a new crisis, again centered on Greece.

The figure for the euro zone as whole, due at 05:00 a.m. EDT (0900 GMT), is forecast to show it shrank by 0.2 percent, following a 0.3 percent contraction in the last three months of 2011 – putting it back into recession.

Germany’s strong showing could just allow the currency bloc to skirt recession and it certainly bolstered markets which were battered on Monday by growing fears that Greece will plunge Europe back into crisis by leaving the euro zone.

The FTSEurofirst of top European shares climbed 0.5 percent in response, safe haven German government bond futures dipped and the euro recovered some poise.

A Reuters poll of 41 economists had forecast German growth of 0.1 percent on the quarter. The actual figure beat even the highest forecast. Strength was broadly based with both exports and domestic consumption gaining ground.

France, by contrast, was held back by weak household demand and slowing exports.

“There was no good surprise,” said Philippe Waechter, chief economist at Natixis Asset Management of the French data. “There was weak consumption, no investment.”

Germany is the exception to a euro zone picture which shows nearly all its constituent parts back in recession or flirting with it.

Italy’s economy contracted 0.8 percent in the first quarter, the third consecutive quarterly decline and the steepest for three years, according to preliminary data which were weaker than expectations.

The Dutch economy also contracted for a third consecutive quarter, shrinking 0.2 percent.

Data released two weeks ago showed Spain has already succumbed to recession as it struggles to reduce its budget deficit and shore up a banking sector beset with bad property debts.

Greece, still without a government nine days after elections as its political parties argue about whether to rip up its bailout program, is in its fifth consecutive year of recession, which is tantamount to a depression.


Later on Tuesday, Francois Hollande will be sworn in as French president and hot-foot it to Berlin for talks with German Chancellor Angela Merkel.

Hollande is demanding new growth-boosting measures for Europe. Merkel has not disagreed in principle but is unlikely to accept anything that will require extra spending that pushes government debt up again.

Italian Prime Minister Mario Monti is also pressing for a growth strategy. He got support from an unlikely source when ratings agency Moody’s sharply downgraded 26 Italian banks, saying budget-cutting measures and an Italian recession had hit demand and increased the level of bad loans.

A hefty defeat for Merkel’s conservatives in a German state election on Sunday, meted out by the Social Democrats who have argued against austerity for austerity’s stake, will add to the pressure on the chancellor.

Optimism at the start of the year that the euro zone would escape a downturn has been crushed by unexpected contractions in manufacturing, consumer confidence and business morale, while one in 10 of every worker in the euro zone is out of a job.

Without economic growth, tax revenues will fall and cutting Europe’s debt mountain becomes even harder.

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