Europe Economy

German and French Economic Growth More than Halve


German economic growth more than halved in the fourth quarter as a drop in household spending offset a strong gain in equipment investment and a positive contribution from net trade, data showed on Thursday.

Gross domestic product (GDP) increased by 0.3 percent in seasonally adjusted terms compared with the third quarter, when expansion of 0.7 percent was recorded, according to preliminary
Federal Statistics Office figures.

The fourth-quarter figure was in line with the mid-range  forecast of 45 economists polled last week.

Sebastian Wanke at DekaBank in Frankfurt said the slowdown at the end of last year marked the start of a prolonged period of weakness in Europe's biggest economy that would likely last
well into the summer.

"Foreign trade probably won't provide any more support to growth due to the strength of the euro and the weakness of the global economy," he said.

"Private consumption is unable initially to offset that because it hasn't shown the desired recovery due to elevated inflation ... But we will just about avoid stagnation. There should be a soft temporary landing before the economy picks up again toward the end of the year."

Economists have been looking to German households to take over as a motor of expansion from exports, which are expected to post much weaker growth this year.

So far, however, there is little evidence consumers have increased spending despite a steady fall in unemployment from above 5 million in early 2005 to 3.4 million in January and the prospect of bigger salary hikes in this year's wage round.

Surveys of consumer sentiment have shown households are upbeat about the labour market but worried about inflation and recent turbulence on financial markets.

Negative Impulses

The Statistics Office said growth in the fourth quarter was powered by a further strong increase in equipment investment and by net trade, suggesting German exporters had yet to feel the pinch from the strength of the euro.

"There were negative impulses (in Q4) from consumption, characterized by falling household spending," the office said.

On the year, GDP increased by 1.6 percent in the October to December period after annual growth of 2.4 percent in the third quarter, the figures showed.

Adjusted for one fewer working day in the fourth quarter of 2007 compared with the year-earlier period, GDP increased by 1.8 percent on the year.

Europe's largest economy grew by 2.5 percent in 2007, the office said, confirming an estimate made last month. In 2006, GDP increased by 2.9 percent, the most since 2000.

The Office is due to publish a breakdown of the latest GDP figures on Feb. 26.

French Growth Also Halves

French growth more than halved in the last three months of 2007 due to swings in inventories, yielding full year growth that was just below the government's official forecast, data showed on Thursday.

The first estimate of fourth quarter gross domestic product (GDP) showed the euro zone's second-biggest economy grew at a quarterly rate of 0.3 percent in the fourth quarter and by 1.9 percent in 2007, national statistics office INSEE said.

Economists polled by Reuters had on average expected growth of 0.4 percent after a third quarter in which the economy grew by 0.8 percent, its strongest quarterly rate of expansion in just over a year.

The annual growth rate compared with the 2.2 percent seen in 2006 and the government's official forecast of 2.0-2.5 percent.

"It's about in line with expectations. What is important now is how household consumption will hold up in the first quarter after the price rises we have seen," said Olivier Gasnier, economist at Societe Generale in Paris.

Both the French and German indicators gave markets an early sign of what to expect from  euro zone GDP data which will be released later on Thursday.

"We are expecting euro zone GDP of 0.3 percent for the fourth quarter," said Gasnier.