WIESBADEN, Germany, Jan 15 - The German economy shrank in 2003 for the first time in a decade, and a recovery that gathered pace towards the end of the year is on fragile foundations, the Federal Statistics Office said on Thursday. Gross domestic product contracted by 0.1 percent compared with 2002, slightly worse than economists had expected. Growth in the fourth quarter was likely to be "clearly below" an expectation of 0.5 percent quarter-on-quarter, Statistics Office expert Wolfgang Strohm said at a news conference in Wiesbaden. "Overall the economic development was disappointing in Germany in 2003, as in the two previous years," Statistics Office President Johann Hahlen told reporters. "There were signs of a weak recovery in the second half of the year but one can't yet speak of a sustained revival." Last year was the third year of stagnation in Europe's biggest economy that has exacerbated funding problems in its generous welfare system, forced the budget deficit above European Union limits and kept unemployment above four million.
Germany's last full year of recession was in 1993, when the economy contracted 1.1 percent, although that came after a brief boom sparked by unification of West and East Germany in 1990. Germany's public sector deficit swelled to 4.0 percent of GDP last year, from 3.5 percent in 2002, the Statistics Office said, well above the EU's three percent cap. Exports in 2003, up 1.1 percent versus 2002, were too weak to offset lacklustre private consumption, down 0.2 percent, and a drop in capital investment of 3.3 percent. Ulla Lahl, an economist at Mizuho Corporate Bank, said: "The main reason for the figures was weak investment in Germany last year. This came as a result of stock market instability caused by the war in Iraq and uncertainty within Germany over the reform debate." Tax cuts which came into force on January 1 as part of Chancellor Gerhard Schroeder's "Agenda 2010" package of labour market reforms and benefit cuts would help boost retail spending in 2004, but not by much, said Lahl.
INVESTMENT, CONSUMPTION TURNAROUND
"The pent up demand which has accumulated and the easing tax burden on consumers and businesses mean that we can hope to see a turnaround in investment and consumption," Economy Minister Wolfgang Clement said in a statement. The government has forecast the economy will grow between 1.5 and 2.0 percent this year, roughly in line with most private sector forecasts, helped by an increase in working days as a number of public holidays will fall on weekends. But Clement has warned in recent days that the surge in the euro's exchange rate may erode the competitiveness of the euro region's exporters. He last week called on the European Central Bank to lower interest rates to stem the euro's gains. ECB policy makers left borrowing costs unchanged at their meeting last Thursday, though ECB President Jean-Claude Trichet said on Monday he doesn't welcome "brutal" currency moves. The euro rose to a fresh record against the dollar on Tuesday close to $1.28 but has since fallen back to around $1.2650. The U.S. buys about one tenth of Germany's exports. Still, Germany has benefited in recent months as a global economic upswing boosted demand for its goods and helped to offset the strength of the euro. Industrial production, about a quarter of the economy, increased for a second straight month in November and new orders rose for a third month, suggesting output will expand further in the months ahead. The growth outlook for the euro zone as a whole is somewhat brighter than for its biggest economy, according to a European Commission forecast published on Thursday. The combined economy of the dozen euro nations is likely to have expanded between 0.3 to 0.7 percent in the fourth quarter of last year and should maintain that momentum in the first three months of 2004, the Commission said. Germany's Statistics Office is due to publish GDP data for the fourth quarter of 2003 on February 19.//