Europe

Germany and France Escape Recession


A steady flow of economic indicators released in recent days points to a light at the end of the tunnel for Germany and Europe after months of economic malaise. French and German gross domestic product (GDP) climbed 0.3 percent during the second quarter, official data revealed on Thursday, signalling an end of the recession in both countries and inspiring confidence that the worst phase of the global downturn has passed.

Germany's earlier-than-expected economic upturn in the three month period that ended in June boosted markets on Thursday, helping the euro extend recent gains and bolstering share values in European companies.

Meanwhile, the speed of the recovery cheered politicans: "The data is very surprising. After four negative quarters France is coming out of the red," said French Finance and Economy Minister Christine Lagarde.

Germany's economics minister, Karl-Theodor zu Guttenberg, said the data was "encouraging," but cautioned: "There is still a long way to go before our economy regains its level of a year ago."

The figures mean that Germany has emerged from its deepest recession since World War II, growing for the first time since early 2008, the Federal Statistical Office reported. Economists had forecast a contraction of the economy by 0.2 percent for the quarter.

"Following the unparalleled freefall of the winter months, the worst recession in Germany's postwar history seems to be over," Jörg Krämer, chief economist at Commerzbank, wrote in a research note, adding that he expects strong economic figures in the second half of the year.

A "Stabilization of Economic Activity"

With the release of the data, the European Central Bank is now saying that growth in the euro zone—the countries where Europe's common currency has been adopted—could come earlier than previously expected. "There are in fact currently signs of the stabilization of economic activity," ECB member Jürgen Stark told the Börsen Zeitung newspaper. He said those assertions were no longer based solely on poll data, but also on economic data.

Still, Stark warned against exaggerated optimism. "What we are currently seeing, is largely a product of stimulus measures undertaken by governments and companies building up their inventories again."

In Brussels on Thursday, the European Union's statistical agency, Eurostat, reported that GDP shrank by 0.1 percent in the second quarter in the 16-country euro zone compared to the first three months of the year. Although the economy for the area where the euro currency is used contracted, it still perfomed better than economists had predicted. However, euro zone GDP was down 4.6 percent compared to the second quarter of last year.

However, the outlook remains mixed for Germany's export-led economy, where success hinges on global demand. Although recent figures suggested an improvement in exports and industrial orders, both key indicators of the country's economic health, the economy as a whole is expected to contract sharply in 2009. Second-quarter GDP still trails 7.1 percent behind the same period last year.

Countering the tentative signs of a recovery, German unemployment is on the rise and retail sales reflect weaker domestic demand. At the same time, more and more firms are going bust. In May, the number of bankruptcies increased by almost 15 percent, compared with the same month in 2008. Making the headlines, Germany's high-profile fashion house Escada, filed for bankruptcy protection this week, in part due to slumping global demand for its high-end garments.

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