German Economy Shrinks for First Time Since 2013

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(Corrects headline in story dated Aug. 14 to show German statistics office revised 2013 GDP data.)

Germany’s economy contracted more than economists forecast last quarter and France stagnated, adding to pressure on the euro area as the Ukraine crisis and slowing inflation (ECCPEST) threaten to derail the region’s recovery.

Gross domestic product in the Germany, the currency bloc’s largest economy, fell 0.2 percent from the first quarter, when it rose a revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a contraction of 0.1 percent, according to the median of 37 estimates in a Bloomberg News survey. Data earlier today showed the French (FRGEGDPQ) economy, the region’s second-largest, posted zero growth in the period, compared with a median estimate for a 0.1 percent gain.

While Germany’s second-quarter weakness was largely due to a warm winter that shifted production to earlier months, the outlook is now clouded by Russia’s territorial dispute with Ukraine. That imperils the euro area as a whole, where Italy has already returned to recession and inflation is running at the slowest pace since 2009.

“Demand for German industry goods in the euro zone and in emerging markets has decreased strongly and we expect a relatively weak third quarter,” said Stefan Muetze, an economist at Helaba in Frankfurt. “After this, we expect an increase in dynamism and more growth toward the end of the year.”

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German construction investment “clearly” shrank last quarter because of the extremely mild winter, the statistics office said. Net trade subtracted from GDP as imports outpaced exports, while private and public consumption rose.

Euro-area GDP growth probably slowed to 0.1 percent in the second quarter from 0.2 percent in the first three months of the year, according to a separate Bloomberg survey. That report is due from the European Union’s statistics office in Luxembourg at 11 a.m. today. Austria and the Netherlands are scheduled to report national figures before then.

The Frankfurt-based Bundesbank predicted in June that the German economy will expand 1.9 percent this year and 2 percent in 2015. Bundesbank President Jens Weidmann told Phoenix TV this week that he’s sticking “more or less” to those forecasts, while saying the Ukraine crisis could weigh on the outlook.

The EU agreed last month to curb Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet over the country’s support of separatist militias in Ukraine. Germany is Russia’s biggest European trading partner.

Dusseldorf-based Rheinmetall AG reduced its 2014 profit forecast after the German government blocked a contract to build a military training center east of Moscow. Fraport AG, the operator of Frankfurt’s airport, cut its retail outlook after the number of Russians departing Europe’s third-busiest hub fell 3.8 percent in the first half.

A gauge of investor confidence in Germany fell this month to the lowest level since 2012. Factory orders slumped in June by the most in more than 2 1/2 years, with the Economy Ministry citing political tension as one reason.

The crisis in eastern Europe comes as the euro area struggles to recover from its longest-ever recession, which ended last year. Inflation in the currency bloc was 0.4 percent in July, and has been stuck at less than half the European Central Bank’s goal of just below 2 percent since October. Italy, the region’s third-largest economy, has recorded a second straight quarter of contraction.

ECB President Mario Draghi has called for countries to implement structural reforms, saying last week that nations that have done so are recovering faster. Spain (SPNAGDPQ)’s economy expanded last quarter at its quickest pace since 2007, beating Germany for the first time in five years. Greece’s (GKGNGDPY) economy contracted at its slowest pace in almost six years.

Draghi also warned that “heightened” political risks could affect the region’s “weak” recovery. The central bank announced an unprecedented package of stimulus measures in June, including a negative deposit rate and targeted loans for banks, that will take time to work through to the real economy.

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Paul Gordon

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