Germany adds to eurozone crisis

German economic growth slowed to a near standstill in the second quarter of this year, dealing a further, unexpected blow to the crisis-hit eurozone.

The surprisingly-sharp deceleration in activity in Europe’s largest economy hit overall eurozone growth and intensified fears about the global slowdown. It also threatened to complicate the challenge facing the region’s policymakers as they seek to combat its escalating debt crisis.

German gross domestic product increased by only 0.1 per cent in the three months to June compared with the previous quarter, the country’s statistical office reported. Germany had been a star performer among western industrialised economies in the first quarter of this year. But data for the first quarter were also revised down to show a rise of 1.3 per cent compared with the 1.5 per cent originally reported.

The revisions showed German economic activity in the second quarter remained below the early 2008 pre-crisis peak – whereas earlier data had shown it had exceeded that level already in the first quarter.

The figures marked “a turning point in the German business cycle,” said Andreas Rees, economist at Unicredit in Munich. “It is a regime shift. The period of exuberant growth is now behind us.”

The economy’s skid almost to a halt left a deep impression on eurozone growth data released later by Eurostat, the European Union’s statistical office. It said GDP across the 17-country region rose by only 0.2 per cent in the second quarter, after a 0.8 per cent rise in the first three months of the year.

That brought eurozone growth in line with the pace seen in the UK, which also expanded by 0.2 per cent in the second quarter, and below the 0.3 per cent rate of expansion seen in the US.

Germany’s disappointing data followed unexpectedly weak French GDP figures on Friday, showing growth in the eurozone’s second largest country was flat in the second quarter and weakened stock markets across Europe. The euro slid from three-week highs against the dollar.

Italy emerged as an unlikely best-performer among the eurozone’s largest economies, having already reported a 0.3 per cent rise in second quarter GDP. Spain reported a lacklustre 0.2 per cent rise – roughly in line with its performance in the previous two quarters.

Economists had expected Germany’s economy to slow after an exceptionally strong start to the year but had still forecast GDP would rise by about 0.5 per cent. Few details were given but the statistics office said exports and investment had provided “positive contributions”. However imports grew more than exports, so the balance between exports and imports acted as a drag on growth. Consumer spending and the construction sector also acted as brakes on activity.

Carsten Brzeski, economist at ING in Brussels, argued the latest data marked a “return to normality” rather than disaster. But he said the “million dollar question” was whether the second quarter marked the “beginning of the end” of Germany’s economic miracle.

Mr Brzeski concluded: “Strong economic fundamentals still seem to outweigh fading sentiment driven by market developments.” Nevertheless, Christian Schulz, economist at Berenberg Bank, warned that significant risks could “stem from a loss of confidence due to the European debt crisis and its perceived cost to the German tax payer”.

Nicholas Sarkozy, French president, and Angela Merkel, German chancellor, are due to meet later on Tuesday to discuss the latest developments in the European sovereign debt crisis. The two countries have ruled out issuing eurozone bonds to solve the crisis.

On Monday it was revealed that the ECB purchased €22bn of eurozone government debt as it sought to calm markets.

Germany’s economy contracted sharply after the collapse of Lehman Brothers in late 2008 but staged a more rapid recovery than other countries, boosted by its engineering exports to fast growing countries such as China.

In sharp contrast to the US and UK, Germany has also seen unemployment falling steadily for the past two years – to the lowest level for two decades. That boosted hopes that a pick up in domestic demand would reduce the country’s reliance on exports to power growth. But the latest data suggest that “re-balancing” of the German economy has still to feed through into the growth data.