Analysis: Germany faces recession risk as crisis hits confidence

Wed Dec 21, 2011 11:32am EST
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By Sarah Marsh

BERLIN (Reuters) - After breezing through the euro zone debt crisis for the past two years, Germany's economy could fall into recession as anxious businesses hold off on investment and exports wither.

Economists who once predicted a mere slowdown in growth for Europe's largest economy are now slashing their forecasts and predicting contraction, possibly for two consecutive quarters, depriving the region of its most powerful motor.

In a sign the government is worried about the darkening economic outlook, Berlin last week resurrected its bank rescue fund and said it could reinstate "Kurzarbeit" subsidies that helped firms pare back working hours without firing staff.

Both measures were first introduced at the height of the global financial crisis, when the German economy suffered its worst annual contraction since World War Two.

"It's not a classical recession, here we are dealing with a large amount of uncertainty due to the euro zone crisis which will weigh on investment and trade," said Felix Huefner, an economist at the Organisation for Economic Co-operation and Development (OECD) in Paris, who follows Germany.

"The fundamentals actually look better than in other countries, with little need for fiscal consolidation, solid household debt levels, unemployment at a 20-year low."

Huefner said Germany had nonetheless entered a "mild recession," with the economy likely to contract in the fourth quarter, and stagnate in the first three months of 2012.

Some are much more gloomy: the Duesseldorf-based IMK on Tuesday became the first major German economic institute to predict the economy would shrink over the full year, forecasting contraction of 0.1 percent.   Continued...