German economy contracts in Q2

Weaker consumer spending led to a contraction of the German economy in the second quarter of this year for the first time since 2004 and household morale is poised to deteriorate further, data showed yesterday.

Europe's largest economy contracted by 0.5 percentage points on the quarter in the April-June period, after expanding by 1.3 per cent in the first three months of the year, the Federal Statistics Office confirmed. Consumer spending and gross capital investment both shaved 0.4 percentage points from the quarterly growth total. Germans' shopping habits are key to the overall economy's performance as consumer spending accounts for over half of gross domestic product (GDP).

In a blow to the economic outlook, the GfK market research group's forward-looking indicator showed consumer sentiment deteriorated more than expected heading into next month, hitting a new five-year low on worries about the economic outlook.

"The GfK index doesn't offer much hope of consumption picking up in the third quarter either," said Uwe Angenendt, analyst at BHF-Bank. "We'll probably end up seeing a further contraction in the summer, even if it will probably only be slight. So then we'd be looking at a technical recession," Angenendt added.

A recession is commonly defined as two or more consecutive quarters of negative growth, and a number of leading economists have said the economy could contract again in the third quarter.

Trade, a major driver of growth in recent years, boosted growth to the tune of 0.4 percentage points – but only because imports (-1.3 per cent q/q) fell by more than exports (-0.2 per cent q/q). Government spending added 0.1 percentage points.

Corporate Germany is braced for tough economic conditions. "The road ahead is stonier and steeper, and the competition is tougher", BASF Chief Executive Juergen Hambrecht said late last month after reporting a 19 per cent rise in quarterly operating profit.

The GfK reading showed consumers are downbeat. The indicator, based on a survey of 2,000 Germans, fell to 1.5 for September from a downwardly revised 1.9 in August. The reading was the lowest since June 2003.

A Reuters poll of economists had pointed to a September reading of 2.0 after a previously reported reading of 2.1 for August.

"The weak economic outlook is choking consumption," said GfK analyst Rolf Buerkl. A GfK gauge of survey respondents' business cycle expectations fell to -21.8 in August from -8.0 in July, falling to its lowest level in over four years. The component indices lag the headline indicator by one month.

The GfK's propensity to buy gauge also fell, dampened by inflation concerns, and dropping to -27.9 in August from -26.2 in July.