Germany Pulls Out of Recession With 0.2% Growth

Germany pulled out of recession as its economy grew by 0.2% in the first quarter of 2002, ahead of elections later this year, government figures showed today.

The news will come as a welcome boost for Chancellor Gerhard Schroeder, who has staked his reputation on the handling of the economy. Europe's biggest economy shrank slightly in the third and fourth quarters of last year in its first recession since 1993.

Mr Schroeder faces a strong challenge in elections in September from his conservative challenger, Edmund Stoiber, at a time when Germany's reputation as an economic powerhouse has taken a severe knock. Most worryingly for Mr Schroeder unemployment remains stubbornly high at 9.7%, or about 4m.

Even as the German economy spluttered back to life after its mild recession, the Bundesbank, Germany's central bank, earlier this week warned that the improvement was limited and that the economy remained vulnerable. The slight upturn is having no impact so far on unemployment or overall manufacturing capacity, it said.

The German government is now worried that recovery will be snuffed out if the European Central Bank raises interest rates as inflation in the eurozone remains too high for its liking. Inflation is now at an annual 2.4% and has been above the 2% limit the bank considers acceptable for 23 consecutive months.

The office of federal statistics said that exports were largely responsible for the slight pickup, but domestic demand remained weak. Exports rose by 1.9% from the last quarter of last year, following a 1.1% drop in the previous quarter. Imports fell by 2.9%, after being flat in the previous three months.

Meanwhile, domestic demand fell by 1.4%, and plant and equipment investment dropped 2.7%. Weakness in consumer demand was highlighted yesterday when Europe's largest department store and mail order group, KarstadtQuelle, reported a pre-tax loss of 120m euros (£76m) for the first quarter compared to a loss of 80m euros a year ago.

Developments in the Middle East that might affect the price of oil, and a tough round of wage negotiations this year between employers and unions, could have an impact on whether the growth is sustainable, the federal office of statistics said.