No light at end of tunnel for Schroder

The latest growth - or more correctly "no growth" - figures from Germany show the extent of the economic difficulties in Europe's biggest economy. The figures, showing growth of just 0.2 per cent last year, make a further reduction in euro-zone interest rates more likely early this year.

The figures - which indicate that the Germany economy stagnated completely in the final quarter of last year - were even worse than the 0.5 per cent growth that had been expected. Business investment has fallen sharply - down 8.5 per cent last year. Meanwhile, unlike most other major economies, Germany is also hampered by anaemic consumer spending, with exports providing the only buoyancy. The outlook for this year remains poor, with growth likely to remain under 1 per cent.

The European Central Bank (ECB) cut base interest rates by 0.5 of a percentage point to 2.75 per cent late last year. Continued weakness in the Germany economy may persuade the ECB to reduce borrowing costs further early this year.

The bank's past decisions appear to have been strongly influenced by the state of the German economy, according to Dr Dan McLaughlin, chief economist at Bank of Ireland. Unless there is an unexpected recovery in Germany in the coming weeks he expects the ECB to move to cut interest rates further to try to spur recovery. The outlook for growth will also be heavily influenced by the Iraqi situation.

Slow growth will make it difficult for Germany to cut its budget deficit - which was 3.7 per cent of GDP last year - back under the 3 per cent guideline level set by the EU. The tax increases and spending cutbacks required to reduce the deficit will also hold back growth. In its latest review, published yesterday, AIB Capital Markets said that these factors could push Germany into negative growth during the current quarter and that growth prospects would remain poor in the absence of any action to tackle the economy's structural problems.

Germany - which accounts for around 30 per cent of euro-zone output - will thus act as a brake on the single currency economy this year. Growth in France, at 1.1 per cent last year, was only slightly stronger. Irish companies selling to Germany - which takes around 11 per cent of our exports - will be selling into a weak market and there is no immediate sign of a light at the end of the tunnel for Europe's biggest economy.Analysis