German economy set for rebound after contraction in Q4

The German economy, Europe's biggest, shrank in the last quarter of 2012, as the eurozone crisis hit exports, data showed on Thursday, but analysts said activity would bounce back quickly.

The national statistics office Destatis calculated that gross domestic product (GDP) contracted by 0.6 percent in price, calendar and seasonally adjusted terms in the period from October to December.

Analysts and economists had been pencilling in a drop of 0.5 percent after Destatis said in January that the economy had contracted by "around half a percentage point" at the end of last year.

Growth has indeed been slowing all year as the eurozone debt crisis puts the brake on exports.

GDP grew by 0.5 percent in the first quarter of 2012 and then by 0.3 percent in the second quarter and 0.2 percent in the third quarter.

With the contraction of 0.6 percent in the fourth quarter, the economy expanded by just 0.7 percent across the whole of 2012, compared with 3.0 percent in 2011, Destatis said in a statement.

The statisticians noted, however, that due to the timing of the Christmas holidays, there were three fewer working days in 2012 than in 2011.

Adjusted for that effect, the German economy grew by 0.9 percent overall last year, they calculated.

The fourth-quarter data "offer mixed signals," Destatis said. "While consumer and state spending increased slightly, investment in construction was down and investment in equipment fell even more sharply," it said.

-- Exports hit --


"The main reason behind the contraction was foreign trade, which was relatively weak in the final quarter of 2012. Exports of goods declined more sharply than goods imports," Destatis explained.

The 17-nation eurozone slid deeper into recession in the fourth quarter of 2012, when the region's economy shrank by 0.6 percent after already contracting by 0.1 percent in the preceding quarter.

But in Germany, at least, economists are confident the dip will be short-lived.

Economy Minister Philipp Roesler said the 0.6-percent drop was "in line with our expectations. High uncertainty in Europe is putting the brakes on investment and economic activity in Germany.

"But this weakness is only temporary. During the course of the year, the German economy will find its way back to growth. Current indicators, such as business surveys, confirm this," the minister said.

Analysts agreed.

"Overall, the German economy suffered a setback in late 2012... but all the signals coming from leading indicators since November point to a rapid rebound in early 2013," said Timo Klein at IHS Global Insight, pointing to the Ifo business climate, the ZEW barometer of investor confidence and the key PMI or Purchasing Managers' Index, which have all risen recently.

Andreas Rees at UniCredit also saw the year-end contraction in the German economy as "only a temporary dip and not the start of a recession,

"We stick to our optimistic story for the German economy. There will be a growth comeback already in the first quarter with a further significant acceleration down the road," he said.

Barclays Research analyst Thomas Harjes said the latest PMI and Ifo surveys suggested that a swift recovery of the German economy is currently underway, as global growth is picking up again and fiscal headwinds fading.

"Moreover, private investment should soon expand again as risk aversion and uncertainty relating to the euro area crisis and other global risks diminish gradually," Harjes said.

ING Belgium economist Carsten Brzeski also believed that "there is increasing evidence that the economy should pick up speed again very quickly."

"All in all, even if today's numbers are disappointing, they are no reason to start singing the blues on the German economy. The contraction should be a temporary gaffe rather than a new worrying reality," he said.

Commerzbank chief economist Joerg Kraemer agreed.

"Previous economic cycles suggest that the recent rise in early indicators will feed through into the hard data fairly quickly," Kraemer said.

"In the first quarter of 2013, the German economy will grow noticeably again. For 2013 as a whole, we're projecting an increase of 1.0 percent," he said.