German economy 'on mend' as confidence soars

A contraction in the German economy at the end of last year was a hiccup, analysts said on Friday, as data showed business confidence in Europe's economic powerhouse soaring this year.

The federal statistics office Destatis confirmed an earlier estimate that German gross domestic product (GDP) contracted by 0.6 percent in the final quarter of 2012, weighed down by a 2.0-percent slump in exports.

Economic growth in Germany slowed throughout all of last year as the eurozone debt crisis put the brake on exports.

GDP grew by 0.5 percent in the first quarter of 2012 and then by 0.3 percent in the second quarter and 0.2 percent in the third quarter.

With the contraction of 0.6 percent in the fourth quarter, the economy expanded by just 0.7 percent across the whole of 2012 -- or 0.9 percent in calendar-adjusted terms.

Nevertheless, a whole range of experts -- from analysts to economic think-tanks, the government and even the Bundesbank -- are convinced that the dip in growth will prove only temporary and GDP will start growing again as early as the first quarter of 2013.

Economic sentiment in Germany could hardly be better.

Earlier this week, the key ZEW barometer of investor confidence rose to levels last seen before the start of the three-year-old debt crisis.

And on Friday, the even more closely watched Ifo business climate index notched up its strongest gain in two and a half years to hit its highest level since April 2012.

"The German economy is regaining momentum," said Ifo president Hans-Werner Sinn as his institute's index jumped by 3.1 points to 107.4 points in February.

"Satisfaction with the current business situation continued to grow. Survey participants also expressed greater optimism about their future business perspectives," Sinn said.

"It just gets better and better. Germany is heading for a strong rebound," said Berenberg Bank economist Robert Wood.

"The Ifo points to strong and rising growth in the first half of 2013. Germany is heading up," he said.

Wood said that the recent easing of financial market tensions "has taken time to feed through to the real economy. But the German surveys have picked up sharply, and output growth should follow."

Risks remained, the expert cautioned, pointing to Italian elections this weekend.

"Nevertheless, our base case is that Germany should be embarking on another period of strong growth, which will also help the rest of the eurozone by boosting demand for their exports," Wood concluded.

Johannes Gareis at Natixis said the Ifo data "are positive news for the prospects of the German economy and underpin the upbeat investors' morale.

"Hence, Germany should be back on track for positive growth in the first quarter of 2013. Nevertheless, as there are still many challenges to overcome due to the ongoing eurozone crisis, risks to the downside of growth remain," he said.

IHS Global Insight economist Timo Klein said that improvements in all key sentiment indicators -- the purchasing manager index or PMI, Ifo and ZEW -- "all point to a rapid GDP recovery in early 2013."

And he suggested worries about the negative effects of the strengthening euro were misplaced.

"Despite having strengthened modestly since September 2012, the euro is still at quite competitive levels for Germany's export industry. This is helping additionally at a time when demand in countries such as the US and China is picking up again," Klein said.

Overall, IHS Global Insight is projecting that year-average German GDP growth will be 1.0 percent in 2013 and 1.4 percent in 2014," the analyst added.

Destatis also said Germany's public finances were back in the black for the first time in five years, with the overall public budget showing a surplus of 4.2 billion euros ($5.6 billion) for 2012.

Measured against GDP of 2.644 trillion euros for the year as a whole, that represented a surplus ratio of 0.2 percent, slightly higher than a preliminary estimate of 0.1 percent released in January.

It is the first time since 2007 and only the third time since unification in 1990 that Germany's finances have been in the black, the statistics authority said.

Under EU rules, member states are not allowed to run up deficits in excess of 3.0 percent of GDP.

In 2011, Germany's finances had been in the red with a deficit equivalent to 0.8 percent of GDP.