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German economy stalls
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August 23, 2001: 10:37 a.m. ET
Europe's biggest economy grinds to a halt in Q2; ECB may cut rates
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LONDON (CNN) - Confirmation that German economic growth has stalled could give euro-zone monetary chiefs the excuse to cut interest rates next week.
Growth in Europe's biggest economy ground to a halt in the second quarter, official figures from Germany's Federal Statistics Office showed on Thursday, as most economists had predicted.
The numbers reflect output and investment cutbacks by companies suffering from excess stock amid a global economic slowdown. The construction industry came under pressure as building work on factories and offices dwindled.
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This will encourage the ECB to lower rates sooner rather than later
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Ken Wattret
Economist, BNP Paribas |
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German Finance Minister Hans Eichel refused to be downcast, however, telling ZDF television there was "no reason for pessimism." Referring to tax cuts that came into force in January, Eichel forecast an upturn in demand later in 2001.
"We see that the inflation rate is going down, so that there is a chance that tax reform with its enormous relief in the second half of the year will begin to work," Eichel said.
But that isn't likely to deliver a revival in the economy until the end of the year, economists warned.
"The (second-quarter) numbers are nothing to shout about, and they could have been worse," Ken Wattret, an economist at BNP Paribas, told CNN. But he warned: "We can expect the third quarter to be subdued and possibly a better fourth quarter."
The European Central Bank holds its next interest rate-setting meeting on meeting to set on August 30. The majority of economists now expect it to cut rates on that day.
"This will encourage the ECB to lower rates sooner rather than later," said Wattret. "Their own growth target (for the euro zone) is 2 1/4 to 2 1/2 percent. They won't achieve that now."
The ECB has stubbornly decided not to cut rates since May despite calls from economists and politicians concerned about the effects of U.S.-led economic slowdown on the 12-nation euro zone.
Central bank officials have signalled that the battle against inflation took precedence over any move to ward off recession when they met at the start of August for their most recent interest rate deliberations.
Slowing inflation
Economists say there is now room for the ECB to cut rates at it next meeting on August 30, as inflation in the euro zone is slowing.
Inflation in the euro zone fell to 2.8 percent in July from 3 percent in June, after hitting a peak in May of 3.4 percent. However, the ECB is mandated to keep inflation below 2 percent.
The U.S. Federal Reserve on Tuesday cut its official rates for the seventh time this year, bringing the federal funds rate to 3.5 percent, while the Bank of England has cut four times in 2001 in an effort to stimulate growth.
The latest figures on the German economy come a day after German business leaders unexpectedly reported an upturn in confidence in July, but experts warned it was too soon to hail an economic revival.
Economists said the explanation might have been partly that respondents to the July survey had harboured hopes of a cut in euro interest rates at the start of August, whereas the European Central bank in fact kept rates unchanged. 
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