Record German Growth Drives Euro-Region Expansion

Germany’s economy grew in the second quarter at the fastest pace since the country’s reunification two decades ago, driving faster-than-forecast expansion in the 16-nation euro area.

German gross domestic product surged 2.2 percent from the first quarter, fueling euro-area growth of 1 percent, the fastest in four years. Economists had forecast GDP would rise 1.3 percent in Germany and 0.7 percent in the currency bloc.

Germany, Europe’s largest economy, is benefiting from a recovery in global demand after last year’s recession just as the euro’s 10 percent decline against the dollar this year makes its exports more competitive outside the region. At the same time, European governments are cutting spending to rein in ballooning budget deficits, threatening to slow growth in coming months.

“It’s a Germany-driven story,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “While there are growth risks stemming from the fiscal consolidation efforts in peripheral countries, we won’t see a double-dip scenario in Europe.”

The euro rose a quarter of a cent after Germany’s GDP report before easing back to $1.2843 at 11:55 a.m. in Frankfurt.

Two-Speed Europe

Germany’s performance highlights the growth differential across the euro region in a quarter that saw the Greek fiscal crisis threaten to break the bloc apart. France’s economy expanded 0.6 percent in the period, Italy’s 0.4 percent and Spain’s 0.2 percent, while Greece, which was forced to seek a European Union bailout in May, experienced a 1.5 percent contraction.

“Looking ahead, the peripheral economies will continue to suffer from fiscal tightening and look set to remain in, or return to, recession,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “The German recovery will weaken as global demand slows and its own fiscal consolidation begins next year.”

Germany, which accounts for about a quarter of the euro region’s economy, was responsible for almost two thirds of the bloc’s second-quarter growth, according to Eurostat, the European Union’s statistics office in Luxembourg.

The increase in German GDP was the strongest quarterly gain since records for the reunified country began in 1991. First- quarter growth was also revised to 0.5 percent from 0.2 percent. Euro-area GDP rose 0.2 percent in the first three months of the year.

‘Superman’

In annualized terms, the German economy expanded about 9 percent in the second quarter, said Andreas Scheuerle, an economist at Dekabank in Frankfurt. That puts it on a footing with emerging markets like China and India.

“Superman is wearing black, red and gold this year, Germany’s national colors,” said Carsten Brzeski, an economist at ING Group in Brussels. “But at some stage he’ll become Clark Kent again. The economy can’t keep growing at this rate.”

The data nevertheless suggest Germany’s economy, which contracted 4.7 percent last year, will grow “far more than 2 percent in 2010,” Economy Minister Rainer Bruederle said in an e-mailed statement. In June, the Bundesbank predicted growth of 1.9 percent this year and 1.4 percent in 2011.

UniCredit today raised its 2010 growth forecast for Germany to 3.5 percent from 2 percent, said Munich-based economist Alexander Koch.

Exports, Investment

Germany’s statistics office said exports and investment were the main growth drivers in the second quarter. At the same time, private and public spending made positive contributions.

Bayerische Motoren Werke AG, the world’s largest manufacturer of luxury cars, on Aug. 3 reported its biggest profit in 2 1/2 years after demand for the new 5 Series surged and sales advanced in China and the U.S. Infineon Technologies AG, Europe’s second-largest chipmaker, on July 28 raised its fiscal 2010 forecast for a third time on semiconductor demand from makers of cars and consumer electronics.

“The German economy is driven by external stimuli and domestic consumption is likely to remain sluggish,” said Stefan Bielmeier, chief economist at DZ Bank in Frankfurt. “Therefore, Germany will feel the impact of weakening global demand.”

Factory orders in the U.S., the world’s biggest economy, fell more than economists forecast in June, while China’s industrial output rose the least in 11 months. German investor confidence declined for a third month in July.

German Chancellor Angela Merkel’s Cabinet in June approved levies on banks, air travel and nuclear-power plants as part of what she called an “unprecedented” round of budget cuts, rejecting U.S. calls to spur growth. The program, a mixture of spending cuts and revenue-raising steps, amounts to 81.6 billion euros ($105.1 billion) from 2011 through 2014.

Still, “the German economy will reach its pre-crisis level much earlier than thought, around the end of 2011,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “The growth momentum will cool down in the second half but that’s normal after such a phenomenal upswing.”

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

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