German slowdown worse than feared By Ralph Atkins in Frankfurt

Published: February 13 2009 08:39 | Last updated: February 13 2009 08:39

Germany’s economic slump in the final quarter of 2008 proved worse than feared, official figures showed on Friday, with the country posting the sharpest fall in gross domestic product since the country was reunified in 1990.

The larger-than-expected 2.1 per cent plunge in GDP in the final three months of the year showed Europe’s largest economy contracting at a faster pace than the UK in the same period and threatening to drag down the performance of the 16-country eurozone.

German engineering sector prepares for cuts - Feb-10Berlin moots banks paying bail-out losses - Feb-12German industrial output in record fall - Feb-06Recent confidence indicators, such as the Munich-based Ifo’s business confidence survey, have suggested the worst point of Germany’s recession is over. Still, economists expect Germany’s economy to contract by at least 2 per cent this year - which would make it by far the worst year in the country’s post-second world war economic history.

Unlike the UK or US, Germany has not been hit by collapse in housing markets, and its financial sector is relatively small. But German exports, which had previous powered growth, have been badly affected by the slump in global demand since September’s collapse of Lehman Brothers, the US investment bank.

Joerg Kraemer, chief economist at Commerzbank in Frankfurt, said: "The Lehman failure gave the German economy an uncertainty shock, and in the first quarter German GDP is likely to see another dramatic contraction. However, uncertainty has now eased slightly. If it continues doing so, the German economy might at least stop contracting after mid-year."

Sharp falls in recent German industrial production late last year had hinted that the overall growth figure would be worse than expected. The country’s statistical office gave no details but blamed the fourth quarter contraction on falls in exports and investment.

Germany had already fallen into recession before the impact of the Lehman collapse had been felt. GDP contracted by 0.5 per cent in both the second and third quarters of last year as a result of then high oil prices, higher interest rates and the global economic slowdown that was already under way.

Offering a glimmer of hope, the statistics office noted that employment had continued to increase in the fourth quarter, and that the number in jobs was the highest since German reunification. However unemployment has started rising again in recent months.