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FRANKFURT — The economic stagnation in Europe has taken a significant toll on Germany, with government figures released Tuesday showing that the Continent’s flagship economy contracted in the fourth quarter of last year.
BERLIN — Despite a drumbeat of optimistic forecasts from economists and upbeat statements from various European leaders, the actual news on the economy continues to be grim, with figures released Tuesday showing that Germany, the Continent’s flagship economy, contracted by about 0.5 percent in the final months of last year. Combined with a flurry of disappointing results recently in other major economies, the stumble raised questions about Europe’s ability to escape recession.
The Federal Statistical Office in Wiesbaden estimated that the German economy shrank about 0.5 percent in the final three months of 2012, compared with the previous three months. The decline was largely the result of sagging investment by German managers worried about the future of the euro zone.
Portugal’s central bank cut its economic forecast for the year on Tuesday, saying its economy will contract more steeply than expected. France said it was likely to miss its target for narrowing the budget deficit, raising the prospects of deeper spending cuts and additional taxes. Last month, Britain said its austerity budgets would extend three extra years, to 2018, because of weaker than expected growth.
And despite reassurances from economists that growth would bounce back quickly in Germany, the data underlined how closely the country’s fate remained tied to its ailing euro zone allies.
“This idea that Germany is a powerhouse dragging the rest of Europe along with it is a bit of a myth to be honest,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “You have a very weak periphery and a core which is not as strong as everyone seems to believe.”
“This idea that Germany is a powerhouse dragging the rest of Europe along with it is a bit of a myth, to be honest,” said Philip Whyte, a senior research fellow at the Center for European Reform in London. “You have a very weak periphery, and a core which is not as strong as everyone seems to believe.”
Throughout the debt crisis, Germany has managed to float above the bad news, enjoying record employment, rock-bottom borrowing costs and export-led growth that kept chugging, in spite of the cloud hanging over the euro zone. But its European partners are also among its biggest customers, leaving it vulnerable to the Continent-wide slowdown exacerbated by the very austerity policies of Chancellor Angela Merkel.
Throughout the European debt crisis Germany has managed to float above the bad news, enjoying record employment, rock-bottom borrowing costs and export-led growth that kept chugging in spite of the cloud hanging over the euro zone. But Germany’s European partners are also among its biggest customers, leaving it vulnerable to the Continent-wide slowdown made worse by the very austerity policies championed by Chancellor Angela Merkel.
“The longer the euro crisis lasts, the more difficult the situation becomes for Germany,” said Stefan Kooths, an economist at the Kiel Institute for the World Economy. “Germany is not a Teflon economy.”
Portugal’s central bank on Tuesday cut its economic forecast for this year, saying the economy would contract more steeply than expected. France has probably missed its target for reducing the budget deficit, according to data published Tuesday, raising the prospects of deeper spending cuts and additional taxes. Meanwhile, elections pending in Italy next month have ground that country’s drive toward economic overhauls to a halt.
The German government is scheduled to release its report on the economy on Wednesday, and it will forecast growth in 2013 of 0.5 percent, the newspaper Handelsblatt reported. In the euro zone as a whole, which is in recession with record unemployment, any growth is considered positive. But most forecasts are based on the assumption that financial markets will remain calm. If anything shakes investor confidence, like political turmoil in Italy or Greece, the weak growth rate means Germany would not have much cushion against recession.
“The longer the euro crisis lasts, the more difficult the situation becomes for Germany,” said Stefan Kooths, an economist at the Kiel Institute for the World Economy. “We have always said Germany is not a Teflon economy.”
France will probably miss its deficit reduction target for 2012, according to preliminary data released Tuesday by the French government. Officials in Paris aimed for a deficit of 4.5 percent of gross domestic product, but data for November suggests the shortfall will be 4.8 percent, ING Bank estimated.
The German government is scheduled to release its report on the economy Wednesday and will forecast growth of 0.5 percent this year, the Handelsblatt newspaper reported, saying it had obtained a copy of the document. In the context of the euro zone as a whole, which is in recession with record unemployment, any growth is considered positive.
That means President François Hollande would have to find an additional $6.65 billion in revenue to meet the 2013 budget target, and France could face another credit rating downgrade. The data also shows the challenge of keeping France’s overall debt level from rising above its current level of more than 90 percent of G.D.P.
But most forecasts are based on the assumption that financial markets will remain calm. If anything were to shake investor confidence in the euro zone, like political turmoil in Italy or Greece, the weak growth rate would mean that Germany would not have much of a cushion against recession.
By contrast, Germany’s public finances are robust. Federal, state and local governments recorded a surplus for the year equal to 0.1 percent of G.D.P., the first government surplus since 2007. That creates leeway for Ms. Merkel to stimulate the economy with public spending if the downturn is worse than expected.
France is en route to missing its deficit reduction target this year, according to preliminary data released Tuesday by the French government. Although the government aimed for a deficit of 4.5 percent of gross domestic product, data for November suggest the shortfall will be 4.8 percent, ING Bank estimated.
Despite the contraction in the fourth quarter, a compilation of annual economic data by the statistical office showed that the German economy is in fundamentally good shape. Exports rose 4.1 percent during the year, and 41.6 million people were employed — a record high and the sixth annual increase in a row.
That means the French president, François Hollande, would have to find an additional €5 billion, or $6.7 billion, in revenue to meet the 2013 budget target, and could risk another downgrade of the country’s credit rating.
And Jörg Krämer, chief economist at Commerzbank in Frankfurt, said in a note to clients that he expected the German economy to expand again in the first half of the year.
The data also indicate the challenge of keeping France’s overall level of debt from rising beyond its current level, which is already above 90 percent of G.D.P.
Still, Mr. Whyte, of the Center for European Reform, said that while he was more optimistic than at this time last year, “we’re still not out of the woods.”
“Today’s figures underline how difficult the task will remain for François Hollande to keep the debt below 100 percent of G.D.P. during his mandate, and France’s rank in the core of the euro zone,” Julien Manceaux, an economist at ING, wrote in a note.
Nicholas
Kulish reported from Berlin, and Jack Ewing from Frankfurt.
German public finances contrast with those of France. Together, German federal, state and local governments recorded a budget surplus for the year equal to 0.1 percent of G.D.P, the statistical agency in Wiesbaden said. That is the first government surplus since 2007, and it creates leeway for Ms. Merkel to stimulate the economy with public spending if the downturn is worse than expected.
The fiscal strength in Germany underscores the inequities within the euro currency union. Already, the government has been expanding a program that encourages companies to cut worker hours rather than eliminate jobs. The so-called short work program uses government money to compensate employees for some of the wages they lose by putting in fewer hours.
Within the region, Germany has served as a crucial counterweight to the struggling economies of Southern Europe, and helped to stabilize the euro zone as a whole.
The country’s economic might has also given Ms. Merkel an especially strong say in euro zone policy. Her clout and insistence on fiscal austerity in return for German financial support has often irked other leaders, but it has made her popular at home. She is an overwhelming favorite to win a third term in nationwide voting in September.
“Most of the decline can be blamed on weakness in the rest of Europe,” said Martin Lueck, an economist at UBS in Frankfurt. “Voters will not blame it on Ms. Merkel.”
Despite the contraction in the fourth quarter, a compilation of annual economic data by the statistical office showed that the German economy was in fundamentally good shape. Exports rose 4.1 percent during the year, and 41.6 million people were working — a record high and the sixth annual increase in a row.
And the German government achieved a budget surplus for the first time since 2007, without having to impose the kind of austerity that has choked growth in France, Britain or Italy.
For the full year, German gross domestic product grew 0.7 percent after adjusting for inflation, much slower than in 2011 when the economy grew 3.1 percent, the statistical office said. The statistics agency did not give a precise figure for the last quarter of 2012, but said the economy shrank roughly half a percentage point compared with the third quarter. The statistical office will release an official figure for the fourth quarter next month.
Recent surveys have shown that business people in Germany and the rest of the euro zone are becoming more confident because of action by the European Central Bank to calm bond markets and eliminate risk that the euro zone could break apart. There is the danger, though, that placid markets will only encourage complacency on the part of policy makers.
“The current problems are covered by monetary maneuvers which are by no means a long-term answer to the problems,” Mr. Kooths, of the Kiel Institute, said. “Monetary policy can just disguise the real problems for a couple of months, a couple of quarters, but can’t solve them.”
German exporters, however, are likely to be among the first in Europe to benefit from stronger growth in the United States and Asia. Jörg Krämer, chief economist at Commerzbank, said in a note to clients that he expected the German economy to expand again in the first half of the year.
Meanwhile, Mr. Whyte of the Center for European Reform said: “I’m more optimistic than I was at this time last year. We have made progress but we’re still not out of the woods.”
