Pressure mounts for rate cuts as Germany falls into recession

Germany officially entered recession yesterday as new figures showed that Europe's largest economy had contracted for the second quarter in a row.

Germany officially entered recession yesterday as new figures showed that Europe's largest economy had contracted for the second quarter in a row.

The government said GDP fell 0.1 per cent during the three months to September, which included the impact of the US terrorist attacks.

As the economy fell slightly in the second quarter – 0.03 per cent – Germany now meets the technical definition of recession as two successive quarters of contraction.

This is likely to be reinforced with another, more severe fall in the final three months of the year. DIW, a German economics institute, said the economy could shrink by as much as 0.5 per cent.

On an annual basis Germany is growing at just 0.3 per cent – its lowest rate since early 1997. The figures, which come a day after Germany's key Ifo business survey plunged to an eight-year low, will raise the pressure for cuts in interest rates.

Yesterday the European Central Bank, which cut a half-point a fortnight ago, left rates unchanged in line with its new policy of only making monetary policy decision at its first meeting of the month.

Gustav Horn, DIW's chief economist, said the call that was made in October by all six institutes for the government to take action had now become more urgent. "We said because the outlook was uncertain, something should be done. Now it really has to be done," he said.

Germany's finance ministry said the data indicated that economic risks had increased but tried to avoid use of the word recession.

"Economic weakness should be overcome soon," the ministry said in a statement. "In 2002 economic forces of buoyancy should win the upper hand."

However the breakdown of the data appeared to shatter the government's claim that Germany has simply been knocked by the impact of the global slowdown and 11 September.

Domestic demand slumped by 1.3 per cent in the third quarter while consumer spending fell 0.2 per cent. In contrast exports rose 1.1 per cent, or 4.8 per cent higher than a year ago.

Christopher Hausen, an economist at Commerzbank, said: "The present economic downturn has not been caused by the recession in the US. To a large extent it is a local development."

Germany's economic woes have heightened appeals for action from the German government, including calls by opposition politicians for a 1,000 deutschmark (£320) cheque to be mailed out to each household.

But Chancellor Gerhard Schröder has stoutly resisted demands for an economic stimulus package, a stance that has been backed by the independent Organisation for Economic Co-operation and Development.

The 12-nation single currency bloc is expected to grow by 1.6 per cent this year and 1.3 per cent in 2002, with Germany trailing with annual growth of about 0.7 per cent.

The world's third-biggest economy and the second-largest exporter, where one in five jobs depends on exports, tends to suffer more at times of global downturns and consequently benefit more from rising world trade.

Despite the gloom the euro was unmoved at about 87.88 cents to the dollar. Steven Saywell, currency strategist at Citibank, said: "We have seen some terrible numbers in the last few weeks but the euro does not seem to budge which suggests we could be close to a bottom for the currency."

The major movement on the currency markets was a fall by the yen to its lowest level against the dollar for three months.

The drop was triggered by newspaper reports that the US government had responded positively to a Japanese proposal to add foreign bond buying to its arsenal of measures used to weaken the currency.