German Economy Grew at Fastest Pace in Two Decades in 2010

Germany enjoyed its fastest economic expansion in two decades last year as booming exports spurred hiring and consumer spending.

Gross domestic product jumped 3.6 percent, the most since data for a reunified Germany began in 1992, after slumping 4.7 percent in 2009, the Federal Statistics Office in Wiesbaden said today. The figure was in line with the median forecast in a Bloomberg News survey of 28 economists. Germany had a budget deficit of 3.5 percent of GDP last year.

The Bundesbank expects Europe’s largest economy to expand 2 percent this year and 1.5 percent in 2012 as the sovereign debt crisis damps demand in the euro area, its main export market. Germany’s Continental AG, the second-biggest tire maker in Europe, yesterday reported sales and earnings that beat its 2010 goals.
“The growth momentum continued into the first quarter and current forecasts might turn out to be too pessimistic,” said Klaus Baader, co-chief euro-area economist at Societe Generale in London. “The German economy will likely have returned to its pre-crisis level in the third quarter.”
The euro was little changed after the GDP report, trading at $1.3014 at 9:33 a.m. in Frankfurt.

Domestic Demand
Domestic demand was the main contributor to GDP growth, adding 2.5 percentage points, the statistics office said. Private consumption rose 0.5 percent, state spending increased 2.2 percent and capital investment jumped 5.5 percent.
Net trade contributed 1.1 percentage points to growth, with exports surging 14.2 percent and imports up 13 percent.

Unemployment dropped by 262,000 people in 2010, boosting household spending in the second half of last year. Business sentiment rose to a record high last month and consumer confidence is close to its highest in more than three years.

“Domestic demand is now picking up in Germany -- it’s doing that hardly anywhere else in the euro zone,” said Nick Kounis, head of macro-economic research at ABN Amro Bank NV in Amsterdam. “We are at the start of a period where we are going to see much stronger German demand.”

That’s widening the divergences in the 17-nation currency bloc as some countries grapple with the debt crisis, making it harder for the European Central Bank to set policy suitable for all its members.
The ECB in December extended emergency liquidity measures for banks through the first quarter after Ireland’s aid package failed to convince investors that governments can push down budget deficits and prevent a breakup of the euro area. The ECB has left its key interest rate at a record low of 1 percent since May 2009.

“The growth divergences may lead to higher inflation in Europe’s largest economy because the union’s periphery is not ready for an adjustment in interest rates,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “This dilemma means that the German growth outlook remains rosy.”

To contact the reporter on this story: Christian Vits in Wiesbaden at cvits@bloomberg.net