Germany's Bundesbank says second quarter growth to show definite improvement, risks remain

FRANKFURT – Germany’s central bank expects the country’s economy to improve “markedly” in the second quarter — a development that could boost the wider eurozone as it struggles to get out of recession.

The Bundesbank said Tuesday that Europe’s largest economy should expand more robustly after a weak first three months of the year. Germany grew only 0.1 per cent in the first quarter in part because cold weather delayed the construction season.

In its monthly report, it said that construction activity will catch up. It also cited “reason to hope” that companies will start investing in machinery and equipment to meet increased demand for goods — a key stage in any recovery. Industrial orders unexpectedly rose in March by 2.2 per cent, instead of declining as analysts had expected.

So far, the report said, corporations continue to hold back on new investment, primarily because of weak demand for products — even though conditions for financing new investment are “exceptionally favourable.” The European Central Bank cut its key interest rate to a record low of 0.5 per cent on May 2 and bank lending rates remain low.

The Bundesbank warned, however, that troubles with too much government debt in other euro countries — Germany’s major trading partners — means “risks remain high.” While interest rates are low in Germany, they are higher in countries such as Spain and Italy, where banks are making loans harder to get and charging customers more because their own finances are strained.

Stronger German growth could help the eurozone climb out of its recession. The economy of the 17-country currency union shrank 0.2 per cent in the first three months of the year. Growth is suffering as governments cut spending and raise taxes to try to reduce debt. The ECB expects a gradual recovery in the second half of the year.

Official German second-quarter growth figures are due in mid-August, a little over a month before elections in which Chancellor Angela Merkel will seek a third term as chancellor.


AP staff writer Geir Moulson in Berlin contributed to this report.