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German Chancellor Angela Merkel


The German economy contracted by a record 5 per cent last year due to a slump in its key export sector, but the government is poised to raise slightly its forecast for modest growth in 2010.

The 2009 slump, deepened by a dip back down to around zero growth in the fourth quarter, was more than five times more severe than the previous post-war nadir in Europe's largest economy.

The contraction was also worse than Reuters' consensus forecast for gross domestic product (GDP) to shrink by 4.8 per cent.

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A Federal Statistics Office official said the economy stagnated in the final three months of the year, deflating hopes of a rebound fired by modest quarter-on-quarter growth earlier in the year.

That reflected broader concerns about the sustainability of the recovery amid weak manufacturing output data from Italy and Britain. German exports declined by 14.7 per cent on the year in 2009, outweighing a drop of 8.9 per cent in imports, the Statistics Office said, adding it looked as though China overtook Germany last year as the world's biggest exporter of goods.

Economists expect exports to lead the recovery in Germany, which is heavily dependent on foreign trade for growth.

"The recovery is mainly export-driven, while private consumption except for stimulus-driven car sales remains an untapped source of growth," said Carsten Brzeski, economist at ING Financial Markets.

Germany will raise its 2010 growth forecast to about 1.5 per cent from 1.2 per cent, government sources told Reuters on Tuesday. Finance Minister Wolfgang Schaeuble already last month described the 1.2 per cent projection as "very cautious".

An official at the Statistics Office said GDP stagnated in the fourth quarter compared with the previous three months "so the change is about 0 per cent."

Germany's economy grew by 0.7 per cent quarter on quarter in the third quarter of 2009 and by 0.4 per cent in the second.

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Uwe Angenendt, economist at BHF-Bank said "the starting conditions for the new year aren't as good as we'd initially hoped for. But we still think the economic situation will continue to stabilize."

The likelihood of a subdued fourth quarter for Italy's economy increased after seasonally adjusted industrial output grew 0.2 per cent in November, a slightly weaker gain than expected, official statistics agency ISTAT reported on Wednesday.

"It's already clear that fourth quarter industrial output will be decidedly weak ... We expect a similar picture for gross domestic product, which should be flat in the last quarter of 2009," said Marco Valli at Unicredit MIB.

In Britain, industrial output rose slightly faster than expected in November, helped by a jump in oil and gas extraction, but manufacturing unexpectedly stagnated for a second month, official data showed on Wednesday.

"At face value headline industrial production is not a bad number, but it is disconcerting that manufacturing went sideways," said Alan Clarke, economist at BNP Paribas.

In Germany, unusually harsh winter weather that has hit construction and transport could end up robbing the country of most of its economic growth in the first quarter, a leading industry group said on Monday.

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A sluggish recovery could hit Germany's labour market this year which could create a political headache for Chancellor Angela Merkel.

German consumer sentiment declined going into January as worries over unemployment weighed on households' readiness to spend, a survey released last month showed.

Industrial companies like Siemens have profited in foreign markets from Germany's reputation as a maker of high quality engineering goods.

Siemens' chief executive officer said last month it would take some time before the global economy returns to precrisis levels, citing Dubai's debt problems as a sign that the financial crisis was far from over.

In 2009, investment in equipment fell by 20 per cent, the Office said.

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