EU’s hopes dented by German contraction

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Michelle Martin and Noah Barkin Berlin

GERMANY suffered a surprise contraction in the second quarter, raising doubts about whether Europe’s largest economy can prop up growth across a continent where tougher sanctions against Russia are already fuelling business anxiety.

The 0.2 percent fall in German gross domestic product (GDP), the first quarterly contraction in more than a year, was driven by foreign trade, a traditional supporter of German growth, and a decline in construction investment, the Federal Statistics Office said yesterday.

Hailed as Europe’s growth locomotive in recent years, Germany now faces the prospect of sinking into a technical recession this year if, as some expect, the escalating showdown with Russia over Ukraine hits the economy harder in the third quarter by crimping trade and discouraging corporate investment.

“The German economy may have slipped into a slight recession due to crises,” said Ferdinand Fichtner, an economist at the Berlin-based DIW think-tank.

The weak German data followed figures showing a similar second-quarter contraction in Italy and stagnation in France, Germany’s biggest trading partner.

Together, the GDP reports raised serious doubts about the strength of Europe’s recovery from the deep financial crisis of past years. Growth in the euro zone as a whole ground to a halt in the second quarter, data from Eurostat showed.

Germany posted robust growth of 0.7 percent in the first quarter, but this strength was exaggerated by an unusually mild winter, which fuelled construction activity at the start of the year.

This was unwound in the second quarter, and the rise in imports exceeded exports in the three-month period, further denting GDP.

The statistics office said public and private consumption had provided modest support in the quarter.

The weak data comes before the impact of tougher sanctions against Moscow. The EU decided to target Russia’s banking, defence and energy sectors in July and this month Russia retaliated by stopping imports of most food from the West.

Exports to Russia, which fell 15 percent in the first five months of the year, make up only 3.3 percent of total German exports. But the stand-off has added to uncertainty among German companies, unnerved by government energy policies and a rollback of pension and labour market reforms under Chancellor Angela Merkel’s seven-month grand coalition.

A string of German companies have complained about the Russia crisis hitting business in recent weeks.

Economist Stefan Kipar at BayernLB said: “Foreign trade won’t make a positive contribution to growth for the foreseeable future.” – Reuters

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