Germany's finance ministry conceded today that Germany, the engine that powered European growth at the start of the year, slipped into reverse in the second quarter, clouding the outlook for the region.
German gross domestic product (GDP) shrank "considerably" in the second quarter, the Finance Ministry said, adding to a litany of gloomy forecasts for Europe which have lately fuelled increasing talk of the risk of recession.
European Central Bank President Jean-Claude Trichet said last week that euro zone growth is likely to be weak in the second and third quarters, as poor economic data stacked up, spreading pessimism among analysts.
"Ever more leading indicators point to a severe slowdown in economic activity for the remainder of 2008," Bank of America economists wrote in a research today.
"On the back of continuing downward pressure on consumers' purchasing power from the spike in oil and food prices, the strong euro and tight financial conditions, a recession risk can now longer be fully discarded," they added.
Similar gloom was apparent outside the euro zone, with Bank of England policymaker David Blanchflower saying in a newspaper interview that the UK is heading into recession and interest rates should fall to "well below" their current 5 per cent.
The German economy grew by 1.5 per cent on the quarter in the first three months of 2008, its strongest expansion since 1996, helped by a boom in construction linked to the mild winter. Growth in the 15-nation euro zone was 0.7 per cent.
However, senior German policymakers have for weeks warned a second-quarter contraction was likely, and the ministry said in its July monthly report that the correction would be big.
"For the second quarter, a considerable decline in GDP is to be expected compared with the previous quarter, not least due to the preceding weather-related gain," the bulletin said.
The Federal Statistics Office is due to publish a preliminary estimate of German second quarter GDP on August 14th. Euro zone and French figures are due on the same day.