16 August 2011 Last updated at 09:58 ET

German economic growth slows sharply

 

Germany had been helping to drive the economic recovery in Europe

Growth in the German economy slowed sharply between April and June and was weaker at the start of the year than previously thought, figures show.

The economy grew by just 0.1% in the quarter, according to figures from the national statistics office. Growth in the eurozone as a whole also slowed.

Germany had been driving the economic recovery in the eurozone.

The figures came as German Chancellor Angela Merkel and French President Nicolas Sarkozy held crunch talks.

The two leaders discussed ways to solve the eurozone debt crisis that has threatened to engulf Italy and Spain and has sparked turmoil on global stock markets.

Figures also released on Tuesday showed that eurozone economic growth slowed to 0.2% in the second quarter, down from 0.8% in the previous three months.

Growth in Spain slowed to 0.2% from 0.3%, while the Italian economy picked up slightly, growing by 0.3% against 0.1% in the first quarter.

The weak growth figures are expected to raise further questions about the strength of the eurozone economy, particularly in light of figures released last week showing that French economic growth came to a standstill between April and June.

European markets fell in early trading following the growth data, but recovered slightly by mid-afternoon. Frankfurt's Dax index was down 1.1%, the Cac 40 in Paris lost 0.9% and London's FTSE 100 falling 0.4%.

In New York, the Dow Jones index opened slightly lower.

Markets had recovered slightly on Friday and Monday from high volatility last week and sharp falls the previous week.

'Serious disappointment'

In addition to the weak second-quarter growth figure, the estimate for German economic growth in the first quarter of the year was revised down to 1.3% from a previous estimate of 1.5%.

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Germany's statistics office Destatis said that while exports grew during the second quarter, a sharp rise in imports "had an altogether negative impact on economic growth".

A fall in household spending also contributed to the drop-off in growth, it said.

"This is a serious disappointment," said Joerg Lueschow at West LB.

"I was surprised that private consumption went down. As a whole, Germany cannot evade the global slowdown."

Balanced budgets

Even France, the bloc's second-biggest economy, was drawn into the crisis last week amid rumours, which were denied on all sides, that it could lose its top-ranked AAA credit rating.

Analysis

Stephan Evans BBC News, Leipzig

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The puzzle for Chancellor Merkel and President Sarkozy is how to keep the eurozone system intact, in its present form of 17 member states, without promising endless bailouts if weaker economies continually fail to put their finances in order.

German economic growth until now has been the potential buffer. But if the latest figures of a measly 0.1% growth for the second three months of the year turn from a blip into a trend, two things happen.

The likelihood of a return to recession in Europe is increased - and that would put more pressure on the public finances of Greece, Portugal, Ireland, Italy, Spain and everybody else.

And the reluctance of the German taxpayer to deliver rescue money in return for the continuance of the euro might be increased.

German economists think two things are going on. One is that consumers seem to have got more fearful and are starting to save rather than spend, not that they were spending crazily before.

And the second is that exports seem to have faltered, and they attribute that to a malaise across the rest of Europe which is Germany's prime market.

Mrs Merkel and Mr Sarkozy have begun key talks on how best to solve the eurozone debt crisis.

Reports had suggested the leaders would discuss the possible introduction of so-called eurobonds - IOUs issued to investors backed by the bloc as a whole rather than individual countries.

Italy has backed the idea, while billionaire investor George Soros told the BBC that the bonds could be an effective way of reducing the borrowing costs of highly-indebted nations.

However, both Berlin and Paris have said eurobonds will not be discussed.

Both French and German leaders, along with the European Central Bank, are putting pressure on so-called peripheral economies to extend austerity measures to try to balance their budgets.

Major economies are also making cuts - Italy announced tougher austerity measures designed to reduce its budget deficit on Friday, while Spain has also said it will speed up spending cuts.

However, there are fears that spending cuts by governments will undermine overall economic growth.

In an article published in the Financial Times newspaper, the head of the International Monetary Fund, Christine Lagarde, warned governments that they must balance spending cuts with measures to support growth to avoid the risk of a double-dip recession.

Ms Lagarde acknowledged the need for governments to reduce debt levels, but said "slamming on the brakes too quickly would hurt the recovery and worsen job prospects".

It could also undermine further the confidence of international investors, she said.

"While [markets] dislike high public debt - and may applaud sharp fiscal consolidation - they dislike low or negative growth even more."