German Economy Contracts for First Time in Four Years

By Christian Vits
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Aug. 14 (Bloomberg) -- The German economy, Europe's largest, contracted for the first time in almost four years in the second quarter, led by a slump in construction.

Gross domestic product fell a seasonally adjusted 0.5 percent from the first quarter, when it rose a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.8 percent decline, the median of 41 forecasts in a Bloomberg News survey showed. In the year, the economy grew 1.7 percent when adjusted for the number of working days.

The stronger euro and slower global growth have damped demand for German exports just as faster inflation erodes domestic spending power. The second-quarter contraction was exacerbated by companies bringing forward investment in construction due to unusually mild weather in the first three months of the year.

``It could have been worse,'' said Andreas Rees, chief economist for Germany at UniCredit Markets & Investment Banking in Munich. ``We won't see a crash scenario, but we don't expect a recovery over the next six months.''

The euro rose to $1.4921 at 8:35 a.m. in Frankfurt from $1.4867 before the GDP report was released.

The second-quarter decline was mostly due to a drop in construction, capital investment and consumer spending, the statistics office said. Trade made a positive contribution largely because of a decline in imports. The office will publish a detailed breakdown of the data on Aug. 26.

Global Slowdown

Expansion in the first quarter was revised down from an initially reported 1.5 percent. Economy Minister Michael Glos said in an e-mailed statement he's sticking with his forecast for economic growth of 1.7 percent this year. The economy expanded 2.5 percent in 2007.

The global economy is cooling after oil and food prices rose to records and the U.S. subprime mortgage market collapsed, making banks reluctant to lend and driving up the cost of credit.

France, Europe's second-largest economy, also shrank in the three months through June, the country's national statistics office said in Paris today. GDP fell 0.3 percent from the first quarter, when it rose 0.4 percent.

The economy of the 15 nations sharing the euro probably shrank 0.2 percent in the second quarter, its first contraction since monetary union a decade ago, another survey of economists shows. The European Union's statistics office in Luxembourg will publish that report at 11 a.m. today.

`Particularly Weak'

Economic growth will be ``particularly weak'' through the third quarter, European Central Bank President Jean-Claude Trichet said last week, prompting investors to increase bets that the bank will start cutting interest rates next year.

The ECB last month raised its key rate to 4.25 percent, a seven-year high, to curb inflation. German consumer prices rose 3.5 percent in July from a year earlier, the statistics office said today, revising up its initial 3.4 percent estimate.

While oil prices have retreated 20 percent from a record $147.27 a barrel reached on July 11, they are still 60 percent higher than a year ago. The euro, which rose to a record $1.6038 on July 15, has gained 10 percent in the past 12 months.

Altana AG, the world's largest maker of additives for coatings and plastic parts, this month cut its full-year profit and sales targets, citing the stronger euro.

Pfleiderer AG, the German laminate flooring maker with 22 factories on two continents, said this week it won't reach its profit forecast due to the fallout from the global financial crisis and rising raw-material costs.

Worse to Come?

``The real slowdown is only starting now,'' said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. ``The worst is still ahead.''

Germany's benchmark DAX share index has dropped 20 percent this year. Business confidence in July fell the most since the Sept. 11 terrorist attacks in 2001 and factory orders declined for a seventh month in June.

Some German companies are trying to offset falling western European and U.S. orders by expanding in eastern Europe, oil- exporting countries and emerging Asia.

Siemens AG, Europe's largest engineering company, last month reported third-quarter earnings that beat analyst estimates on increased orders for power plants and generator upgrades in Russia and China.

``The second quarter is the beginning of long-term weakness in the German economy,'' said Jens Oliver Niklasch, an economist at Landesbank Baden-Wuerttemberg in Stuttgart. ``However, we don't expect a recession.''

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net