German economy’s sharp contraction

Economists expect Germany to bounce back after forecasts for weak growth in the first quarter but Europe’s largest economy will be less of a pillar of support for the rest of the currency bloc, where many of its peers are deeply in recession.

“The German economy might not be an island of happiness any longer but it remains at least an island of growth in a still recessionary eurozone sea,” said ING economist Carsten Brzeski.

Gross domestic product shrank by 0.5 per cent in the final three months of 2012, the worst quarterly performance since Germany fell into a recession during the global financial crisis in 2008/2009 and only the second contraction since it ended.

The fourth quarter pushed overall growth for the year down to 0.7 per cent, a sharp slowdown from the 3.0 percent registered in 2011 and a post-reunification record of 4.2 per cent in 2010.

The government is due to publish an estimate for 2013 growth today. An official from the Economy Ministry said growth would be 0.4 per cent this year, less than half the government’s existing forecast of 1.0 per cent.

So far unemployment remains low and wages are likely to rise again this year, but if ordinary Germans were to feel the pinch of the euro crisis in an election year, it could hurt popular centre-right Chancellor Angela Merkel’s hopes for a third term.