GDP figures not worrying Germany

While the rest of Europe looked nervously

at Germany’s second-quarter GDP drop yesterday, Germans were uncharacteristically cheery.

Yes, the economy shrank by 0.2 per cent in the second quarter compared to the first, but Destatis, the federal statistics office, pointed out that Europe’s largest economy was still 0.8 per cent up on this time last year.

While some analysts attributed the slowdown to the first chill from the EU-Russian sanctions stand-off, Destatis was more circumspect.

The mild winter had contributed to a relatively high growth of 0.7 per cent in the first quarter, said the agency, which aggravated weaker foreign trade and investment figures.

In addition, yesterday’s figures were the first using the new ESA methodology intended to allow greater GDP comparison between EU states. The new rules require Destatis to take into account new sources of revenue – from the illegal drugs trade to the legal prostitution trade. The oldest profession turns over €14.6 billion annually and adds some €7.3 billion to the German economy.

The new rules also affect state spending on arms: Germany previously classified this as an expense but new rules view spending as an investment.

Destatis said its role was to implement the ESA rules “without any moral judgment” but German analysts said the accounting changes should be taken into account with yesterday’s figures.

Debt mountain

The main reason for the cheer yesterday in Germany: for the first time in over half a century the country has begun to start paying off part of its debt mountain. Destatis said Germany’s total debt – federal, state and municipal – has been reduced by €30.3 billion or 1.5 per cent of the total leaving just €2.04 trillion to go.

Strong economic performance and tax revenue has allowed finance minister Wolfgang Schäuble to present the first balanced federal budget in decades. New “debt brake” rules mean state finance ministers are under pressure to follow suit.

“The reduction in the debt took place across all levels of public finances,” said the federal statistics office.

Contributing to the repayment of German debt were several one-off factors involving the sale of bonds – and outsourcing to bad banks – from the state bank WestLB and nationalised property lender Hypo Real Estate (HRE).

Bad euro zone economic data saw interest rates for 10-year German sovereign bonds drop below 1 per cent for the first time yesterday.

Germany's main media showed only modest concern for the stalling economy. The Handelsblatt business daily made light of the effect of the statistical rule changes for calculating GDP, telling readers: "Good morning, we're richer!"

“All GDP figures since 1991 were revised upward, with a statistical effect worth around €80 billion,” it noted.

Die Welt daily appeared more gloomy: its report showed a picture of Vladimir Putin before a huge cannon over the headline: "Russia destroys German prosperity."

But even it took a milder approach in its analysis, saying “the minus is no reason for panic even if economist warn of a mild recession”.