German GDP shrinks

The German economy shrank for the first time in nearly four years in the second quarter of the year, according to data released on Thursday.

German GDP shrinks
Photo: DPA

The gross domestic product (GDP) of the world’s third-largest economy fell by 0.5 percent compared to the first quarter of 2008, the Federal Statistical Office said in a statement.

“The economic trend in the second quarter was characterized by decreasing household final consumption expenditure and smaller fixed capital formation,” the statement said.

The last time the German economy shrank was in the third quarter of 2004, as GDP contracted 0.2 percent. The Federal Statistical Office also revised 2008 first quarter GDP growth lower to an increase of 1.3 percent instead of 1.5 percent as first reported.

“We expected the weakening of growth in the second quarter,” German Economy Minnister Michael Glos said after the release of the data. Despite the slowdown he said the German economy was now more competitive and the government was sticking to its “consciously cautious” forecast of 1.7 percent growth for 2008.

Taken as a whole, the German economy expanded 0.8 percent in the first six months. But economists are not so sure Germany will hit the government target for this year, with Martin Lück at UBS saying that the second quarter result “means more than just a correction from an unusually strong first quarter.”

“Recent leading indicators … have all pointed to a sharp slowdown in the second half. Manufacturing output has slowed sharply in recent months, indicating that the prolonged period in which the German industry appeared to be immune against the toxic mix of global slowdown, strong currency and very high oil prices has now come to an end,” Lück said.

“With growth collapsing in Germany’s most important trading partner countries … we think recession is now also possible in Germany,” Lück said.

Commerzbank’s Jörg Krämer was also downbeat, saying the data “point to real economic difficulties ahead.”

“The leading indicators have meanwhile fallen sharply, suggesting that a hard landing is on the cards — although not as severe as in Spain or the UK,” Krämer said.

Figures also out on Thursday confirmed that inflation in Germany hit a 15-year-high of 3.3 percent high in July, driven by rampant energy and food prices.

The two sets of data illustrate the dilemma facing the European Central Bank.

In order to keep a lid on inflation – which reached a record 4.0 percent in July in the euro zone – it cannot risk lowering interest rates. But high borrowing costs in turn put the brakes on growth.



German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.