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Last Updated: Thursday, 14 August, 2003, 15:08 GMT 16:08 UK
Germany falls into recession
German factory
Germany's economy is at a standstill
Germany is officially in recession, after recording a 0.1% economic contraction in the three months to June.

The figure combines with a 0.2% fall in the previous quarter to produce six straight months of shrinkage - the technical definition of a recession.

Germany's economy has effectively been at a standstill for a year, after seeming to recover from a modest recession at the end of 2001.

Now, economists say that Germany is already on the mend, and the latest monthly employment figures have started to show a much-desired uptrend.

Professing free-market zeal, ministers cannot resist the sort of meddling that harms German business

"Our expectation is that we'll see a slight improvement in the second half," said Rainer Guntermann of Dresdner Kleinwort Wasserstein bank.

"On the whole, we expect zero growth this year."

Eurozone problems

Economic growth was weak this year across the eurozone's biggest economies.

Italy also fell into recession in the first half of 2003, while France is expected to reveal weak economic growth figures next week amid an unemployment rate of nearly 10%.

The European Commission, however, insists that economic growth will pick up at the end of the year and during 2004 - although it has cut its economic growth forecast for the whole of the eurozone to just 0.7% in 2003.

Growth would be helped if the European Central Bank were to cut interest rates further, after finally reducing rates to 2.5% earlier in the year.

Ups and downs

In Germany, the main reason for medium-term optimism is the series of reforms put in place by the government of Chancellor Gerhard Schroeder, who has staked his career on reinvigorating the stagnant economy.

German economic growth
Over the past few months, Mr Schroeder has unveiled moves to cut government spending, shake up the tax system, and deregulate the labour market.

But few economists believe that the reforms will produce an effect before the middle of next year at the earliest.

In the meantime, forecasts of a recovery among Germany's main trading partners - particularly the United States -have offered some economic solace.

Talking tough

Mr Schroeder was re-elected last September in one of the closest elections in recent German history.

We should have seen the writing on the wall 15 years ago and improved our efficiency but no one here wants to go through the pain of change

He has promised to tackle unemployment, which has exceeded 10% under his administration.

But until the last few months, few believed that his left-of-centre government could face down the trade unions and introduce free-market liberalisation.

Many such measures have now been pushed through, despite a series of strikes.

But in the meantime, Germany's three years of below-par growth have held back the whole eurozone.

The BBC's Dominic Dinatale
"The state of the German economy is becoming unbearable for many companies"

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