Is Germany Heading into Recession?

The German economy may have shrunk in the second quarter, and the outlook isn't good. After a promising start to 2008, recession could now be around the corner

New figures on German industrial and export orders released this week suggest the engine of the EU economy has started to sputter. Fears of recession also rose after government officials warned this week about bad news from an upcoming second-quarter report, saying the German economy may have shrunk by around one percent.

The overall picture shows a Europe in the doldrums. German factory orders were down by 2.9 percent in June from May, and orders from abroad for German goods plunged by 5.1 percent. Production at German factories rose by 0.2 percent in June—less than expected—encouraging talk of a Europe-wide recession. Germany accounts for about a third of euro-zone output.

"Demand from abroad is slowing more sharply than domestic demand, which is also on a downward trajectory," said the German Economics Ministry, in a statement. "As a result prospects for industrial production all in all have worsened."

Actual export growth in June rose by a healthy 4.2 percent, but the fall in orders from overseas suggests a glum near future. Recent euro strength—which makes German goods more expensive abroad—has slowed the cautiously growing German economy at a time when prices are also rising in Europe. The European Central Bank decided on Thursday to keep euro-zone interest rates unchanged at 4.25 percent over inflation worries.

The Süddeutsche Zeitung on Tuesday cited government officials who warned that upcoming figures would show the German economy contracted by 1 percent—instead of a generally expected 0.5 percent—in the second quarter of 2008. An official report will come out on August 14. But if those numbers are right, an expert at Capital Economics, a macro-economics research consultancy, said according to Agence France-Presse, it is "likely that the euro-zone will be the first major economy to fall into recession."

Technically there won't be any recession until Germany sees contraction in two consecutive quarters—the second and the third of this year. But a recession hasn't been seen in the eurozone at all since the euro made its debut in 1999.

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