German Growth Slumped in 2008 as Recession Set In

By Jana Randow and Christian Vits

Jan. 14 (Bloomberg) -- German economic growth slumped last year as the global financial crisis hurt exports and damped spending, pushing the euro area’s largest economy into a recession in the second half.

Gross domestic product grew 1.3 percent in 2008 after expanding 2.5 percent in 2007, the Federal Statistics Office said in Frankfurt today. Economists expected growth to slow to 1.4 percent, according to the median of 31 estimates in a Bloomberg News survey. Germany had a budget deficit of 0.1 percent of GDP.

Companies are scaling back production and cutting jobs as global economic expansion slows and demand for German exports wanes. Bundesbank President Axel Weber last week indicated the economy may contract more this year than the 0.8 percent forecast by the bank on Dec. 5.

“All data since December indicate that the economic contraction will be closer to 3 percent than to 0.8 percent,” said Holger Schmieding, chief European economist at Bank of America Corp. in London. A decline of more than 0.9 percent would be Germany’s worst economic performance since records began after World War II.

Company investment in plant and machinery rose 5.3 percent in 2008 from a year earlier, the statistics office said, and construction spending increased 2.7 percent. Exports gained 3.9 percent and imports rose 5.2 percent. Consumer spending, the biggest component of GDP, stagnated.

Fiscal Stimulus

Chancellor Angela Merkel’s coalition yesterday agreed to spend an extra 50 billion euros ($66 billion) this year and next, abandoning a drive to eliminate the budget deficit to focus on battling the recession instead.

The European Central Bank has cut its key interest rate by a total of 175 basis points to 2.5 percent since early October as Europe’s economic slump deepened. Investors bet it will lower borrowing costs again tomorrow by at least 50 points, Eonia forward contracts indicate, even as some policy makers signal they’d rather wait.

ECB President Jean-Claude Trichet said last month there’s a limit to how far the bank can cut rates and refused to give any signal for January. Executive Board member Juergen Stark said on Dec. 10 that the scope for further moves is “very limited.”

“The ECB should lower interest rates by half a percentage point this week and one more time thereafter,” Schmieding said. “They have to, should and will do it.”

German business confidence dropped to the lowest in more than a quarter of a century in December and unemployment rose for the first time in almost three years.

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.