German Economy Barely Expands While France Contracts

The German economy expanded less than forecast in the first quarter and France slipped into recession, increasing pressure on the European Central Bank to do more to stimulate growth.

German gross domestic product rose 0.1 percent from the fourth quarter, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain, according to the median of 41 estimates in a Bloomberg News survey. The French economy contracted 0.2 percent in the three months through March after shrinking the same amount in the final quarter of last year.

The weaker-than-forecast GDP results in Europe’s two biggest economies highlight the risks to the outlook and indicate that the 17-nation euro region is almost certainly still stuck in recession. The ECB cut its benchmark interest rate to a record low of 0.5 percent this month and President Mario Draghi said the bank is ready to act again if needed.

“The worse-than-anticipated start to the year will clearly worry policy makers at the ECB,” said Chris Williamson, chief economist at Markit in London. “Today’s data will add to calls that more action is required beyond what many see as a token gesture of a rate cut.”

The euro dropped more than a quarter of a cent after the German report and traded at $1.2908 at 10:29 a.m. in Frankfurt. The benchmark DAX share index rose to 8344.19, while the CAC 40 dropped to 3964.24. The yield on German 10-year bonds was little changed at 1.37 percent.

‘Almost Exclusively’

Germany’s first-quarter growth was driven “almost exclusively” by household spending, the statistics office said. Investment declined and net trade barely contributed, it said. A detailed breakdown is due on May 24. From a year earlier, the economy shrank 0.2 percent when adjusted for working days.

“The fact that investment, exports and imports declined isn’t nice and signals weak domestic demand,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “The cold winter played a role and there will be something of a rebound in the second quarter but with weaker sentiment, some people might have to think about how realistic current full-year growth forecasts are.”

Commerzbank AG today lowered its German 2013 growth forecast to 0.2 percent from 0.5 percent.

Long Winter

Germany’s recovery may have been delayed by an unusually long winter, which damped construction and business confidence, the Bundesbank has said. It predicted in December that the economy will grow 0.4 percent this year and 1.9 percent in 2014, with inflation averaging 1.5 percent and 1.6 percent respectively.

The Frankfurt-based ECB in March projected the euro economy will contract 0.5 percent this year before expanding 1 percent in 2014. It forecast an inflation rate of just 1.3 percent next year, well below its 2 percent target.

“We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again,” Draghi said in a speech in Rome on May 6. “Monetary policy will remain accommodative.”

Euro-region GDP probably fell 0.1 percent in the first quarter after a 0.6 percent decline in the final quarter of 2012, according to another Bloomberg survey. That report is due from the European Union’s statistics office in Luxembourg at 11 a.m. today.

Italy’s economy shrank 0.5 percent in the first quarter, more than economists anticipated. The Dutch economy contracted 0.1 percent while Austria’s stagnated.

Euro-Area Drag

“The euro area is a drag on the economy and certainly a handicap for German companies,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “The overall outlook still speaks for a recovery, but for the recovery to gain momentum, it’s important for investment to pick up again. That’s what drives job creation.”

In France, President Francois Hollande is struggling to reduce the number of jobseekers from a record 3.22 million and lift his popularity rating from a record low.

With the sovereign debt crisis set to cause a second consecutive year of economic contraction in the euro region, Hollande has been pushing to slow the pace of deficit reduction in the currency bloc in favor of more pro-growth policies.

German business confidence fell for a second month in April and investor confidence rose less than economists forecast in May. The ZEW Center for European Economic Research in Mannheim said yesterday that its index of investor and analyst expectations, which aims to predict economic developments six months in advance, edged up to 36.4 from 36.3. Economists forecast a gain to 40.

German Stocks

At the same time, Germany’s DAX climbed to a record high this month as companies reported better-than-forecast results.

Infineon Technologies AG, Europe’s second-biggest chipmaker, gained the most in almost four years on May 2 after projecting revenue for this quarter that would top analysts’ estimates.

HeidelbergCement AG, the world’s third-largest maker of cement, said on May 8 that first-quarter earnings rose 3.3 percent as North American growth and job cuts helped offset harsh winter conditions that impeded building in Europe.

“Germany is one of the few euro countries that grew at the beginning of the year,” said Alexander Koch, an economist at UniCredit Group in Munich. “Robust demand from the U.S. and Asia bode well for exports and the domestic economy continues to be solid, with private consumption a stable growth pillar.”

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