Germany’s economy could have contracted by as much as 2 per cent in the final quarter of last year, the country’s statistical office warned on Wednesday.

Preliminary estimates, indicating that gross domestic product fell by between 1.5 per cent and 2 per cent compared with the previous three months, highlight the scale of the downturn in Europe’s largest economy.

They are likely to fuel fears that Germany’s recession will the worst since the second world war, and drag down economies across the continent and adding to pressure policymakers to beef-up emergency economic rescue packages.

“We expect real GDP to contract by around 2.5 per cent this year,” said Alexander Koch at Unicredit in Munich.

Statistics office officials warned in Frankfurt that estimating the fourth quarter figure was more difficult than normal because of the exceptional economic circumstances. But a sharp fall had been widely expected after the collapse in industrial production that has already been reported. The first official figures for fourth quarter GDP will be published on February 13.

First estimates for German GDP for 2008 as a whole proved significantly weaker than expected. The 1 per cent, work-day adjusted increase followed a 2.6 per cent rise in 2008. Growth was driven by investment and by government spending. Although exports grew by almost 4 per cent, imports grew faster, and overall foreign trade made no contribution to growth. More Germans had jobs in 2008, however, than in any year since German reunification in 1990.

The public sector deficit shrunk to just 0.1 per cent of GDP in 2008 – but is expected this year to exceed the maximum of 3 per cent allowed under European Union fiscal rules as a result of the government’s fiscal stimulus package.

Source: Financial Times