Germany Officially Enters Recession, Eurozone Likely to be Next

By Jason Simpkins
Associate Editor
Money Morning

Germany has officially plunged into a recession, as the nation’s Federal Statistics Office revealed yesterday (Thursday) that Europe’s largest economy contracted by 0.5% in the three months through September.

The data is worse than many analysts had expected and follows a 0.4% decline in the second quarter. The economy last contracted this much over two consecutive quarters in 1996, making this Germany’s worst recession in more than a decade.

The slide may worsen, too, as German companies are struggling with dwindling export orders.

“If you think today’s numbers are already bad, just wait for the next quarter,” ING Financial Markets’ Carsten Brzeski told Reuters. “The headwinds of the financial crisis and the global economic slowdown are blowing right in the face of the German economy.”

German industrial output fell 3.6% in September from August, while orders for goods produced by the world’s largest exporter fell by 8% in the same time period. Orders from outside Europe fell 11.4%, and domestic orders dropped 4.3%.

“A negative effect on gross domestic product came from foreign trade, with a strong increase in imports and weakening exports,” the statistics office said.

Over 40% of German exports go to other euro area nations, which means other euro nations are scaling back drastically. In that case, Germany’s recession may be the beginning of a economic downturn sweeping through the entire Eurozone.

The German recession has begun in earnest and it’s very serious,” Holger Schmieding, chief European economist at Bank of America Corp. (BAC), told Bloomberg. “It raises the risk of a German contraction of more than 1% next year and we will have to revise down our forecast for the euro area as well.”

The Eurozone economy contracted by 0.2% in the second quarter, which means it, too, has likely entered into a deep recession. Eurostat, the European Union’s statistics arm, is scheduled to publish third-quarter growth data for the region today (Friday).

The International Monetary Fund (IMF) predicts that the economies of developing nations, including the U.S. and Eurozone, will contract 0.3% next year the first such decline since World War II.

The Organization for Economic Cooperation and Development said yesterday (Thursday) that the Eurozone economy would contract by 0.5% in 2009 – in line with IMF forecasts.

“The OECD area economy appears to have entered recession,” the OECD said. “Projections point to a protracted downturn.”

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