German economy records biggest contraction since 1990 in Q1 2009

Germany's gross domestic product (GDP) fell 3.8 per cent from the previous quarter, as investments and exports plunged sharply due to the fall in demand for its products following the global economic crisis, the German Federal Statistics Office said.

Europe's largest economy is heavily dependent on its exports, which declined at a faster rate than its imports. The economy suffered its biggest contraction since reunification in 1990 in the first quarter of 2009. The quarterly data is adjusted for seasonal and calendar effects.

The fall in GDP was far steeper than economists had forecasted - drop of 3.2 percent. This is the fourth straight quarterly decline in GDP.

The German government's forecast of a huge 6 per cent contraction in 2009, against its earlier estimate of 2.25 per cent three months ago, making it worst since World War II (See: German economy to contract 6 per cent in 2009)

Germany entered recession, the GDP reveals "the biggest contraction since the calculation and publication of official quarterly statistics in 1970," the Federal Statistics Office said.

The economy shrank 6.7 per cent year-on-year, adjusted for the number of working days each year making the picture even bleaker.

Last year Germany registered a GDP growth of 1.3 per cent and exports grew 2.7 per cent.
There was sharp decline in exports markedly higher than that of imports and a fall in investment, the Statistics Office said. However, private consumption increased slightly.

German finance minister, Peer Steinbrück, had said that more than 40 per cent of the country's GDP is generated by exports, which would result in severe contraction of the GDP this year.

Earlier this month, German manufacturing orders and output data points towards the economy making a slow recovery in the second half of this year.

Germany is set to hit the hardest from its plunging tax revenues. Finance minister Peer Steinbrück has already predicted a gaping tax shortfall of €320 billion in the next four years because of the recession. This puts restriction on politicians announcing tax cuts ahead of the German election in September.

In another move to boost the economy from its most severe postwar recession, Chancellor Angela Merkel's cabinet finally approved to establish a bad bank plan to rid bank balance sheets of toxic assets and encourage lending, thereby making a effort to push it's economy out of recession. This has yet to be approved by the German parliament, which should not be a problem taking into consideration the majority held by Merkel's coalition government.

It is calculate approximately that German banks hold more than €200 billion ($274 billion) in toxic assets, compared to an estimated €3 trillion worldwide.

The bad bank plan aims at removing the risk of major writedowns from the bank balance sheets and help resume the flow of capital among banks and finally into the real economy. The funding would come from the €500 billion bailout fund known as Soffin, which was passed last autumn and has an un-used fund around €260 billion. (See: Germany unveils €50-billion second stimulus)

The European Commission expects German economy to contract 5.4 per cent this year while International Monetary Fund (IMF) update last fortnight predicted 5.6 per cent decline for the German economy this year, worse than for any other developed country barring Japan.