The German economy is now officially in recession after government figures confirmed yesterday what economists have long assumed - the euro-zone's largest economy contracted 0.3 per cent in the last quarter of 2002.
The slump in Gross Domestic Product (GDP) - the value in monetary terms of the goods and services produced by the economy - was the second in two consecutive months. This is the classic definition of recession, but the German government, facing re-election in September, was anxious to accentuate the positive.
It predicts the economy will grow by 0.75 per cent this year and says "the economic change for the better is at hand".
Figures published on Tuesday showed that business confidence reached a six-month high in February, suggesting the German economy is reaching a turning point.
But news of the German recession did little good for the euro, which closed at 86.39 cents against the dollar, down in its three-week low of 86.44 cents against the dollar.
Of most concern for euro-zone countries was the confirmation yesterday that Germany's budget deficit reached 2.7 per cent of GDP last year.
This was the outcome which EU Commissioner Pedro Solbes feared when he recommended Germany be given a formal warning for nearing the 3 per cent stability pact ceiling.
But Mr Solbes saw his recommendation rejected by euro-zone finance ministers earlier this month.
The German slump, blamed on falling investments and an accelerated decline in private consumption, was worse than many economists had feared. Year-on-year GDP shrank for the first time in five years by 0.1 in 2001, but on a seasonally adjusted basis, the economy experienced zero growth.
As Germany joins Japan in recession, the US is expected to add to their number today after the US Treasury publishes its GDP data.
Confirmation of a German recession is unlikely to influence the board of the European Central Bank (ECB) when it meets in Frankfurt this morning.
Recent comments from ECB president Mr Wim Duisenberg and Mr Ernst Weltecke, the president of the Bundesbank, suggested the key interest rate would be left unchanged at 3.25 per cent.
