German economy may be on brink of recession

Written by Bloomberg | Berlin | Updated: Jan 12 2012, 08:08am hrs
Germany may be on the brink of recession after the sovereign debt crisis caused the economy to contract in the final quarter of 2011.

Europes largest economy shrank roughly 0.25% in the fourth quarter from the third, the Federal Statistics Office in Wiesbaden said on Wednesday. Economists including Christian Schulz at Berenberg Bank expect gross domestic product to contract again in the current quarter. A recession is defined as two consecutive quarters of declining GDP.

If the euro crisis does not get worse or is finally brought under control after another wave in early 2012, the German economy can rebound nicely from the summer onwards, said Schulz, a senior economist with Berenberg in London . However, we see a 25% chance of the euro crisis remaining out of control longer, or completely spiralling out of control with a series of sovereign and bank defaults. In such a scenario, Germany would enter a major recession.

Growth slowed to 3% in 2011 from 3.7% in 2010, which was the most since German reunification two decades earlier, the statistics office said. The economy last contracted in 2009, when it was in the throes of the global financial crisis. Unemployment at a two-decade low may bolster growth this year by supporting consumer spending.

Domestic demand was the main contributor to GDP growth last year, adding 2.1 percentage points, Wednesdays report showed.

Private consumption increased 1.5% in the year, while government spending rose 1.2%. Investment in plant and machinery gained 8.3%.

The weaker global economy and waning demand from debt- stricken euro-area neighbors have eroded German foreign sales, the main pillar of its economic expansion. Net trade contributed 0.8 percentage points to growth last year, with exports up 8.2% and imports gaining 7.2%. In 2010, exports increased 13.7%.

German economy has been resilient, said Annalisa Piazza, an economist at Newedge Group in London.

Signs of moderation

have recently emerged but

we expect the German economy to remain afloat in

the coming quarters, he added

EU banks resist bid to avert credit crunch

Brussels: Banks are hoarding the European Central Banks record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group estimate.