German economy seen slowing in Q3 as euro zone cuts back

BERLIN Mon Nov 12, 2012 4:16am EST

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BERLIN (Reuters) - Growth in Germany, Europe's largest economy, slowed in the third quarter as firms unnerved by the euro zone crisis postponed investments and lost export markets, preliminary data is expected to show this week.

The country for a long time fended off the region's troubles as private consumption remained robust and healthy demand beyond the euro zone negated the effects of weaker European appetite.

But recent data has painted a gloomy picture, showing that even Europe's growth engine is now suffering a setback.

While German gross domestic product (GDP) expanded by 0.5 percent in the first quarter, it slowed to 0.3 percent in the second and economists polled by Reuters see growth weakening further to 0.2 percent in the July-September period.

The Economy Ministry said on Friday GDP probably increased slightly in the third quarter. But it also warned that growth would probably slow in the fourth quarter of this year and the first of 2013.

The euro zone crisis is prompting Germany's shared-currency trading partners to cut back on purchases.

"At the moment we are going through a period of slowdown and weakness. This will continue for a couple of months yet before the economy regains a bit of momentum again around springtime," said Thilo Heidrich at Postbank.

Signs of economic weakness could impact Chancellor Angela Merkel's chances of re-election next year, especially if recent increases in joblessness continue, and could also make it harder for her to justify more aid for struggling euro zone states.

But Germany is expected to fare well compared with the euro zone as a whole, which is seen contracting by 0.2 percent in the third quarter.

SLOWDOWN

Optimism about prospects for Germany, long considered the euro zone's last bastion of growth, is however waning, with the government last month cutting its 2013 growth forecast to 1 percent from 1.6 percent and saying it saw growth of 0.8 percent this year.

Last week, economic advisers to the government, traditionally known as the "wise men", predicted growth of 0.8 percent this year and next.

Recent data has shown output dropping, the private sector contracting, joblessness rising, business sentiment plummeting and exports sliding at their fastest pace since late last year as demand among Germany's euro zone trading partners weakens.

There are dark clouds on the horizon too given that industrial orders fell by some 3.3 percent in September, a particular concern as manufacturing accounts for a third of GDP.

"German industry took a bit of a nosedive at the end of the third quarter and that will probably continue into the fourth quarter, so for Germany there's a pretty sharp fall to come," said Jennifer McKeown at Capital Economics.

Many economists expect German GDP to contract in the fourth quarter for the first time since the end of 2011, though healthy consumer appetite and a robust jobs market should help Germany to avoid a recession, defined as two quarters of contraction.

In a more positive sign, data from the ZEW think tank due on Tuesday is expected to show German analyst and investor sentiment improved for a third straight month in November.

Economic sentiment will rise to -9.8 in November from -11.5 the previous month, according to the mid-range forecast in a Reuters poll of 38 economists.

(Reporting by Michelle Martin. Editing by Jeremy Gaunt.)

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