Germany’s economy shrank at the end of 2012, an official report showed, as weaker global demand and recessions throughout Southern Europe triggered a slide in business investment.
The downturn should be short-lived, analysts said. Key export markets such as the U.S. and China are starting to pick up, while improved sentiment surrounding Europe’s three-year-old debt crisis is expected to spur a recovery in the euro zone this year.
The German economy contracted by a larger-than-expected 0.5% in the fourth quarter of 2012. Dow Jones’s Paul Hannon points out that with exports slowing and the euro rising, any recovery for Germany or the rest of the euro zone in 2013 will be gradual. Photo: Reuters
Still, Tuesday’s report suggests Europe’s largest economy isn’t serving as a locomotive for the 17-member euro bloc, as many economists had hoped. Germany relied heavily on exports last year for growth. Consumer spending, which supports imports from other European countries, remains weak.
German GDP expanded 0.7% in 2012, after two straight years of growth at 3% rates or more, statistics office Destatis said Tuesday. Based on the full-year figures, GDP fell around 0.5% in the fourth quarter from the third, or 2% in annualized terms, according to J.P. Morgan Chase.
“We are down in the valley, and things should increase,” said Olaf Wortmann, economist at the VDMA, an association of German engineering companies. An index of machinery orders compiled by the VDMA plunged in the summer and early autumn, Mr. Wortmann said, signaling a decline in overall business investment. But this index stabilized in October and November, which should propel renewed growth in the engineering sector this year, he said.
Other forward-looking sentiment indicators signal better times ahead. Germany’s purchasing managers’ index, compiled by a survey of purchasing executives, signaled expansion of business activity in December for the first time in eight months. Germany’s Ifo survey has risen in recent months.
“We will have good export performance and additional demand from consumption and construction,” said Ifo economist Steffen Elstner. He expects German GDP will return to growth this quarter, and expand 0.7% in 2013. “Demand coming from China is growing much faster” than any decline from the rest of Europe, he said.
Even if Germany begins to recover soon, last quarter’s GDP contraction sets 2013 off on weak footing. The government is cutting its 2013 economic growth forecast to 0.4% from 1% previously, a German economics ministry official told The Wall Street Journal on Tuesday. For 2014, the government is projecting GDP growth of 1.6%, the ministry official said.
Germany’s contraction suggests euro-zone GDP declined for a third straight quarter at the end of last year, and failed to expand for a fifth straight period as fiscal-austerity programs and rising unemployment likely spurred additional output declines in Spain and Italy. A report Tuesday from the European Union’s statistics office showed a euro-zone trade surplus of €11 billion ($14.7 billion) in November, which should limit the expected decline in GDP.
Workers assemble engines at an Opel car factory in Kaiserslautern, Germany. The economy shrank late last year, but forward-looking indicators are pointing to an upturn.
Germany’s economy has withstood most of the negative effects of the debt crisis that began in Greece three years ago and later threatened Spain and Italy. These countries have posted steep declines in output as high unemployment damped consumer spending, while higher taxes and reduced state spending weakened consumption and business investment. But Germany’s unemployment rate is near record lows, and lower interest rates in Germany—seen as a haven in times of global uncertainty—made it easier for businesses and consumers to finance new spending.
“The weakness will be short-lived,” said Andreas Rees, chief German economist at UniCredit in Munich. “Financial markets should pick up further this year as general uncertainty eases, which will help exports and corporate investment.” Mr. Rees said he expects the economy to expand at a quarterly rate of 0.3% in the first three months of this year, or just over 1% at an annualized rate.
Exports once again drove growth in Germany, gaining 4.1% in 2012 while imports increased 2.3%, Destatis said. As a result, net exports contributed 1.1 percentage points to annual growth.
“There were mixed signals from the domestic side,” Destatis President Roderich Egeler said. Household consumption increased 0.8% in 2012, while government consumption rose 1%.
But investment in 2012 contracted as companies held back spending in light of Europe’s debt crisis and an uncertain global economic outlook. “For the first time since the economic crisis of 2009, investment did not contribute to GDP growth,” Mr. Egeler said.
Investment in machinery and equipment in Germany was down 4.4% in 2012, while construction investment fell 1.1%, the data showed. In total, investment shaved 0.9 percentage point off annual growth in 2012.
“Uncertainties are now more or less priced into” investment plans, said Mr. Wortmann of the VDMA. “We are relatively optimistic” for 2013, he said.