German economy contracts sharply

BERLIN (Reuters) -- Slumping exports pushed German gross domestic product (GDP) down 3.8% in the first quarter of 2009, a far steeper drop than economists had forecast and the economy's worst performance since reunification in 1990.

The Federal Statistics Office said the quarter-on-quarter contraction, based on preliminary data, was led by a sharp decline in exports and a drop-off in investment.

The world's biggest exporter of goods since 2003, Germany is suffering more than other advanced economies from a collapse in foreign demand.

"This is a dramatic plunge and a worse start to the year than we could have imagined," said Juergen Michels, an economist at Citigroup in London.

"It can't get much worse, but not much better either. It is questionable whether the economy will grow again this year."

The euro fell nearly half a cent against the dollar and German government bond futures ticked higher on the GDP drop, which was far steeper than the 3% contraction predicted by economists in a Reuters poll.

The government slashed its economic forecast for the full year late last month and now expects a 6% contraction, led by a plunge in exports of nearly 19%. It is predicting only meager GDP growth of 0.5% next year.

The first quarter contraction was the fourth in a row, the first time since reunification that the German economy has suffered so many consecutive quarters of negative GDP.

It suggested preliminary euro-zone GDP for the first quarter, due on Friday at 0900 GMT, could be worse than the 2% contraction forecast by economists in a Reuters poll.

Despite the bleak start to the year, policymakers and private sector economists see signs the German and broader euro-zone economies are bottoming out.

Economic sentiment indicators have pointed to a brighter outlook for several months and German manufacturing orders and output data released earlier this month suggested the economy could begin a slow recovery towards the middle of the year.

Government subsidies that encourage Germans to trade in their old cars for new ones have led to a sharp rise in auto purchases in recent months and the VDA car association said on Thursday that a "crash" in worldwide sales was easing.

"For the euro zone itself there are signs we reached the low point in the fourth quarter 2008 and first quarter of 2009," European Central Bank Executive Board member Juergen Stark said in Berlin late on Thursday.

Still, German industry continues to suffer and unemployment is expected to push up near record levels seen in early 2005 next year.

The German chemicals industry said on Thursday it faced its worst slump since the mid-1970s. Financial sources have told Reuters that ailing German tourism and retail group Arcandor is poised to ask the government for up to €700 million in loan guarantees.

Fourth-quarter GDP, previously the worst quarter on record, was revised down to a contraction of 2.2%. Previously, it had reported a decline of 2.1%.

Year-on-year, the data showed the economy shrank by 6.7% after a 1.7%decline in the October-December period. Adjusted for working days, German GDP contracted by 6.9% on the year in the first quarter.

The Office is due to publish a detailed breakdown of the first-quarter GDP figures on May 26.