Aug. 14 (Bloomberg) -- The German economy, Europe's largest, contracted for the first time in almost four years in the second quarter, led by a slump in construction.

Gross domestic product fell a seasonally adjusted 0.5 percent from the first quarter, when it rose a revised 1.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.8 percent decline, the median of 41 forecasts in a Bloomberg News survey showed. In the year, the economy grew 1.7 percent when adjusted for the number of working days.

The stronger euro and slower global growth have damped demand for German exports just as faster inflation erodes domestic spending power. The second-quarter contraction was exacerbated by companies bringing forward investment in construction due to unusually mild weather in the first three months of the year.

``It could have been worse,'' said Andreas Rees, chief economist for Germany at UniCredit Markets & Investment Banking in Munich. ``We won't see a crash scenario, but we don't expect a recovery over the next six months.''

The euro rose as high as $1.4936 from $1.4867 before the GDP report was released. It traded at $1.4904 at 12:46 p.m. in Frankfurt.

The second-quarter decline was mostly due to a drop in construction, capital investment and consumer spending, the statistics office said. Trade made a positive contribution largely because of a decline in imports. The office will publish a detailed breakdown of the data on Aug. 26.

Oil-Price Spike

Expansion in the first quarter was revised down from an initially reported 1.5 percent.

The second-quarter contraction was ``marked by the very strong spike in oil prices,'' which dampened consumer spending domestically and abroad, the Bundesbank said in a statement today. ``However, the development in the first half of the year is no reason for pronounced economic pessimism.''

Economy Minister Michael Glos said in an e-mailed statement he's sticking to his forecast for economic growth of 1.7 percent this year. The economy expanded 2.5 percent in 2007.

Growth is slowing around the world after oil and food prices rose to records and the U.S. subprime mortgage market collapsed, making banks reluctant to lend and driving up the cost of credit.

France, Europe's second-largest economy, also shrank in the three months through June, the country's national statistics office said in Paris today. GDP fell 0.3 percent from the first quarter, when it rose 0.4 percent.

`Particularly Weak'

The economy of the 15 nations sharing the euro contracted 0.2 percent in the second quarter, its first contraction since monetary union a decade ago, the European Union's statistics office said today.

Economic growth will be ``particularly weak'' through the third quarter, European Central Bank President Jean-Claude Trichet said last week, prompting investors to increase bets that the bank will start cutting interest rates next year.

The ECB last month raised its key rate to 4.25 percent, a seven-year high, to curb inflation. German consumer prices rose 3.5 percent in July from a year earlier, the statistics office said today, revising up its initial 3.4 percent estimate.

While oil prices have retreated 20 percent from a record $147.27 a barrel reached on July 11, they are still 60 percent higher than a year ago. The euro, which rose to a record $1.6038 on July 15, has gained 10 percent in the past 12 months.

Altana AG, the world's largest maker of additives for coatings and plastic parts, this month cut its full-year profit and sales targets, citing the stronger euro.

Worse to Come?

Pfleiderer AG, the German laminate flooring maker with 22 factories on two continents, said this week it won't reach its profit forecast due to the fallout from the global financial crisis and rising raw-material costs.

``The real slowdown is only starting now,'' said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. ``The worst is still ahead.''

Germany's benchmark DAX share index has dropped 20 percent this year. Business confidence in July fell the most since the Sept. 11 terrorist attacks in 2001 and factory orders declined for a seventh month in June.

Some German companies are trying to offset falling western European and U.S. orders by expanding in eastern Europe, oil- exporting countries and emerging Asia.

Siemens AG, Europe's largest engineering company, last month reported third-quarter earnings that beat analyst estimates on increased orders for power plants and generator upgrades in Russia and China.

``The second quarter is the beginning of long-term weakness in the German economy,'' said Jens Oliver Niklasch, an economist at Landesbank Baden-Wuerttemberg in Stuttgart. ``However, we don't expect a recession.''

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

Last Updated: August 14, 2008 06:52 EDT