German economy slows, heads for Q4 contraction

BERLIN Thu Nov 15, 2012 5:05am EST

1 of 2. A trader's desk is decorated with a German flag and bull and a bear styrofoam figurines during morning trading session at Frankfurt's stock exchange July 7, 2011.

Credit: Reuters/Kai Pfaffenbach

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BERLIN (Reuters) - Germany's economy slowed in the third quarter and looks set to shrink this quarter as Europe's economic powerhouse finally feels the impact of the euro zone crisis, although it should still avoid recession.

German gross domestic product grew by just 0.2 percent in seasonally adjusted terms in the third quarter, flash data showed on Thursday. That was in line with expectations and put it on a par with its previously weaker neighbor France, which beat forecasts for a stagnation.

"That was the last good number from Germany for the time being. The German economy will probably shrink somewhat in the fourth quarter given that orders have been falling for the last year and the business climate ... has recently caved in," said Commerzbank chief economist Joerg Kraemer.

"That is due to uncertainty caused by the euro zone crisis."

Until this year, Germany had escaped the euro zone's problems largely unscathed, growing by a record 4.2 percent in 2010 and by 3 percent last year even as other euro zone states were in recession and some sought bailouts.

But recent data has shown even Europe's paymaster is taking a knock. The private sector is shrinking, while sentiment surveys are sinking, unemployment is on the rise and output is dropping.

Germany's Ifo index dropped for a sixth consecutive month in October and industrial orders dropped by 3.3 percent on the month in September - a worrying sign given that manufacturing accounts for a third of German gross domestic product.

Many economists expect the economy 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.

The Statistics Office said preliminary estimates suggested exports of goods and services had climbed more than imports in the third quarter.

"Positive impetus came from abroad compared with the previous quarter," it said in a statement.

Trade data for July-September pointed to strong demand from countries beyond the European Union while exports to the single currency bloc were weak. In September exports slid at their fastest pace since late last year due to declining demand from euro zone trading partners.

Germany sells around 40 percent of its exports to the single currency bloc and around 60 percent to the European Union as a whole.

Gustav Horn, Director of the IMK economic institute said he was concerned about the collapse in southern Europe.

"It is not hitting us so much directly - the third market effects are worse as France, Britain and even China are exporting less there and that affects us," said Horn.

DOMESTIC DEMAND

Public and private consumption rose more than in the second quarter and investment in construction also increased, almost compensating for a fresh decline in equipment investment and a reduction in order backlogs, the statistics office said.

"The biggest concern, however, is that companies are investing less. That usually points to a recession," Horn said.

German firms have blamed the weak European economy for their problems, with chipmaker Infineon (IFXGn.DE) saying it would cut planned investments and utility E.ON AG ECONGn.DE saying it would review its earnings outlook for 2013.

Morale among German consumers though has remained strong and rose to its highest level in over five years going into November.

Private consumption, which makes up around 60 percent of German GDP, has provided a cushion for the economy this year but if a nascent rise in unemployment continues, that could hit income and, in turn, consumption.

Economists said the German economy would not recover until next year as the global economy picks up and the situation in the euro zone crisis stabilises. That tallies with the BGA trade association's forecast that exports and imports will rise to record levels in 2013.

Preliminary data showed growth slowed to 0.4 percent in the third quarter from a year ago, down from 0.5 percent growth in the second quarter.

Euro zone growth data due at 5 a.m. EDT is expected to show the 17-state currency bloc as a whole shrank by 0.2 percent in the third quarter.

(Additional reporting by Madeline Chambers; Editing by Susan Fenton)

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