Gross national product fell 2 per cent between the last three months of 1992 and the first three months of 1993, a sharper quarterly fall than Britain recorded at any stage of its recession. GNP was 3.7 per cent down on the same period last year. The western German economy has now shrunk for four successive quarters, with some economists warning of another three quarterly falls to come.
'The current recession in west Germany could be worse than those of the 1960s, 1970s and the beginning of the 1980s,' said Gunter Rexrodt, the German economics minister. But the Bundesbank was deaf to pleas for another cut in interest rates to halt the slide, leaving key rates unchanged at its fortnightly council meeting.
The GNP figure surprised the markets, which had been led to expect a smaller fall by the economics ministry. The German mark weakened across the board. The pound rose 0.44 pfennigs to DM2.4655, despite hopes of a rate cut in Britain. The dollar rose half a pfennig to DM1.6005.
The fall in GNP was broadly based. Consumer spending fell 1 per cent on the quarter, government spending dropped 1.5 per cent and capital investment fell 5 per cent. Both imports and exports dropped sharply, reflecting weak demand at home and abroad.
'The fall in the first quarter is particularly worrying because it has clearly spread to the service sector of the economy.,' said Giorgio Radaelli, of Lehman Brothers. 'It is now likely that the fall in GDP this year will be between 2 and 3 per cent, and that there could be negative growth next year as well.'
Bernhard Eschweiler, with JP Morgan in Frankfurt, said he expected output to fall by a further half point or so in the second quarter. 'I am not convinced we have seen the bottom, even if manufacturing has stabilised - and I'm not convinced about that.'
Despite the recession, the Bundesbank is reluctant to cut interest rates further while the money supply grows strongly and inflation remains well above target at more than 4 per cent. But Alison Cottrell, of Midland Global Markets, said she expected the discount rate to be cut from its current 7.25 per cent to as low as 5 per cent by the year-end.
The impact of the German recession is beginning to ripple through to British companies, with car components and consumer businesses hard hit. Both GKN, the engineering and motor components combine, and Tiphook, the container group, have issued profits warnings based on an unexpectedly sharp deterioration in Germany. Profits in the German associate of Sears, the retailing group, halved this year.
But many UK groups have been cushioned by the fact they operate in the housing and construction related sectors. These have continued to grow because of eastern Germany's urgent need for replacement infrastructure.
Redland, the building materials company which draws almost half its operating profits from Germany, said yesterday that it had been fully insulated from the downturn by strong housing demand in the east. 'Our volumes were up by 10 per cent in May, following a similar performance in April,' said Gerald Corbett, finance director. 'There was a small increase of about 2-3 per cent in west Germany but volume growth of more than 40 per cent in the east.'
Similarly, east Germany's urgent need for energy-related infrastructure projects has helped companies such as the engineering group Siebe to weather the storm. Barrie Stephens, Siebe's chief executive, admitted that much of the German economy had simply 'fallen off a cliff' in recent months.
But with the exception of two of Siebe's smaller subsidiaries, which supplied the auto market, the company had been relatively unaffected.
View from City Road, page 30Reuse content