Return of recession dashes German hopes Stagnant economy defies Schröder's reform efforts · Investment bank's fate in the balance
David Gow, industrial editor Friday August 15, 2003 The Guardian Germany sank into recession in the first half of this year, dragging Italy, Holland and most of the rest of mainland Europe with it, official figures showed yesterday. Chancellor Gerhard Schröder and his economics minister, Wolfgang Clement, insisted that the 0.1% contraction in the second quarter after 0.2% in the first showed the economy in stagnation rather than recession. But economists warned that the strength of the euro, which has depressed German exports, falling personal incomes and subdued consumer spending would carry over into next year. Amid forecasts of 4.75 million unemployed next year - a rise of half a million - the federal statistics office said Germany had entered a technical recession for the second time in two years - killing off government forecasts of 0.75% growth this year. Berlin's DIW institute has forecast that the economy will shrink by 0.1% this year before growing 1.3% in 2004, helped by a larger number of working days. Kiel's IfW sees zero growth this year followed by 1.8% in 2004. Mr Schröder, fighting to push through planned economic and social reforms, including ?16.9bn (£12.5bn) of early tax cuts next year, said sentiment pointed to a recovery in the second half. Mr Clement blamed the weak global environment, appreciation of the euro and continuing uncertainty after the war in Iraq for Germany's plight - along with strikes in eastern Germany's manufacturing sector earlier this year. "However, we expect a slight recovery in the second half and the beginning of the economic turnaround that we desperately need," he said, pointing to low interest rates and the planned reforms. The social democrat-led government is banking on a pick-up in business confidence to kick-start the economy but several German companies, many of them laying off staff, warned of depressed demand. ThyssenKrupp, the steel group, reported third quarter pre-tax earnings down from ?316m to ?221m, and warned that its target of ?1.5bn full year profits next year would have to be revised if weakness in its core markets persisted. "If the weakness continues in the coming months, particularly in our important automobile, construction and engineering markets, we will reconsider our plans ... The economic parameters have consistently deteriorated," said Ekkehard Schulz, the chief executive. Wolfgang Reitzle, the former Jaguar chief and now head of forklift truck maker Linde, said the company was beginning to see good results after reporting a 9.6% fall in first half profits to ?253m. But he warned that the weak economy and strong euro were damaging prospects. Deutsche Telekom said the weak economy - and renewed competition - cut domestic sales 5.5% to ?6.2bn, but it beat forecasts by announcing a net profit of ?256m in the second quarter, compared with a loss of ?2bn last year. The company, which has cut thousands of jobs, bucked the gloomy trend by saying it had cut its debt to ?53bn, reaching its target six months early, and planned to reinstate dividend payments that were suspended last year in 2005. E.On, Germany's largest utility, announced a 19% rise in operating profit to ?2.68bn as it acquired a majority stake in Swedish energy company Graninge. It already owns Powergen in the UK. The recession in Europe's largest economy helped propel the rest of the mainland towards prolonged contraction, held up only during the second quarter by 0.4% growth in Greece. The European commission predicted a rise in activity in the second half, driven by consumer spending.
