Page last updated at 12:18 GMT, Thursday, 13 November 2008

German economy now in recession

German car production line
Some German carmakers have had to cut back production

Germany has entered a recession after government figures showed that Europe's largest economy contracted by 0.5% in the third quarter.

This is the second consecutive quarter that the economy has shrunk after a 0.4% contraction in the second quarter.

The fall in economic output, driven by falls in exports, was greater than many analysts had expected.

Rich countries' think tank the OECD has also forecast a fall in Euro-area economic activity of 0.5% next year.

"A negative effect on gross domestic product came from foreign trade, with a strong increase in imports and weakening exports," the Federal Statistics Office said.

The last time that the German economy was in recession was the first half of 2003.

Anecdotal evidence and leading indicators are scary
Carsten Brzeski, ING Financial Markets

"This confirms the German economy is in a marked slump," said Klaus Schruefer at SEB. "We will definitely get a further contraction in the fourth quarter, probably of a similar order," he added.

Worse to come

That pessimistic outlook was echoed by Sebastian Wanke at Dekabank: "There won't be an improvement in the fourth quarter. The situation will only get worse."

Such gloomy predictions are based on the glut of recent indicators showing a slowdown in the German economy.

Orders for goods produced by the world's largest exporter fell 8% between August and September, according to the economy ministry in Berlin. Orders from outside Europe fell 11.4%, while domestic orders dropped 4.3%.

BBC Berlin correspondent Steve Rosenberg said: "Even if you make the best cars and the best machine tools in the world, if there's a global recession, customers can't afford them."

German GDP growth

Last week, official figures also showed that German industrial output fell 3.6% in September compared with August.

"Anecdotal evidence and leading indicators are scary," said Carsten Brzeski at ING Financial Markets.

The European Central Bank also released its quarterly survey of forecasters on Thursday. It showed a cut in the average 2009 growth outlook to just 0.3%, from the 1.3% forecast in the last survey released in August.

"In the view of the governing council, a number of the downside risks to economic activity identified earlier have materialised," said the report.

The Paris-based OECD, which represents the interests of 30 developed economies, also forecast a fall in economic activity in the US of 0.9% next year, with Japan contracting by 0.1%.

More startling, it expects the US economy to contract by 2.8% in the fourth quarter of this year.

Market reaction

The Dax index of leading German shares gained 0.6%, closing at 4,649.52, despite confirmation that Europe's biggest economy is officially in recession.

The Cac-40 in France was also up 0.65%.

The reaction of European markets was encouraging, given the heavy falls in Asian markets overnight. The Nikkei index in Japan closed down 5.3%, while markets in South Korea, Hong Kong and Australia all fell between 3% and 6%.

The falls were triggered by a sharp drop in the Dow Jones index of 4.7%, following the US Treasury's announcement on Wednesday that it would be focusing on taking stakes in banks rather than buying up their toxic debt.

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