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Thursday, 16 August, 2001, 11:12 GMT 12:12 UK
German economy grinds to a halt
The ECB tower in Frankfurt
The ECB is believed likely to cut eurozone interest rates
The German economy slowed to a halt in the second quarter of the year, according to new preliminary figures from the Bundesbank.

Second-quarter gross domestic product (GDP) was the same as in the first quarter, and only 1% up on the same period of 2000, the bank said.

But even that performance was better than had been feared by some.

On Wednesday, the influential DIW economic institute calculated that the economy contracted in the second quarter, and recorded only 0.7% annual growth.

The Bundesbank, whose figures come ahead of official results next week, sounded an upbeat note.

"It is not correct to see Germany already on its way towards recession," the bank said in a statement.

"Short term growth pauses... do not have to lead to longer term slackening."

Slowing, not slumping

The German economy, Europe's largest, has slowed this year.

Although the government is still officially sticking to its forecast of 2% GDP growth in 2001, Chancellor Gerhard Schroeder has said the eventual figure could be lower.

German chancellor Gerhard Schroeder
Gerhard Schroeder wants to kick-start the economy

He is keen to stimulate the economy - and especially to boost employment - ahead of next year's elections.

The finance ministry said it might revise its forecast after official quarterly figures come out next week.

But it is unlikely that full-year figures will slump especially sharply.

Growth prospects could be helped by tax cuts that went into effect at the beginning of the year.

Although unemployment rose in July for the seventh straight month, private consumption and household incomes improved in the second quarter, the bank said.

Rate-cut calls

The figures will only strengthen the consensus that the European Central Bank (ECB) will cut interest rates when it meets on 30 August.

The ECB has so far held firm on interest rates, leaving its key rate at 4.5% while other central banks have cut theirs.

The ECB argues that its job is to manage inflation, not to stimulate growth.

But recent indications that inflation is falling, not only in Germany, but in Spain and France too, make the case in favour of a rate-cut unanswerable, analysts say.

The recent strength of the euro against the dollar and sterling has also bolstered rate-cut proponents.

Paul Mortimer Lee, chief economist at BNP Paribas
"Germany may well be in recession already"
Financial analyst Michael Lewis
"Pressure to cut interest rates are mounting"
See also:

09 Aug 01 | Business
ECB sees 'sizeable' risks to growth
07 Aug 01 | Business
More gloom for German jobs
02 Aug 01 | Business
Eurozone rates left unchanged
18 Jul 01 | Business
Eurozone inflation dips
28 Jun 01 | Business
Europe defies calls for rate cut
14 Jun 01 | Business
ECB downgrades European growth
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