German Domestic Economy Grows as Companies Invest (Update2)

Aug. 23 (Bloomberg) -- Germany's domestic economy expanded in the second quarter for the first time in nine months as company investment rose, adding to signs that economic growth may accelerate in the second half.

Domestic demand, which combines consumer, government and corporate spending, rose 0.3 percent in the from the first quarter, the first gain since the third quarter last year, the statistics office in Wiesbaden said in a faxed statement today. Overall, Europe's largest economy didn't expand in the period as oil prices surged and imports rose more than exports.

As companies including E.ON AG, Germany's largest utility, invest more and the euro's 10 percent decline against the dollar this year supports exports, growth may gather pace even as near- record unemployment and a 51 percent increase in the price of oil this year saps household spending. Germany accounts for almost a third of the economy of the 12 nations using the euro.

``The second half will be better, though we may not get a self-sustaining recovery,'' said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. ``Growth is becoming more broadly based, but private consumption isn't getting any better.''

Investment in plant and machinery rose 0.6 percent in the second quarter from the first, more than compensating for a 0.3 percent decline in consumer spending, the statistics office said.

Spending on Equipment

The statistics office said company spending on equipment and inventories as well as increased government spending drove domestic growth. Import growth of 2.3 percent exceeded export gains of 1.2 percent in the second quarter, resulting in a negative growth contribution from the balance of trade so that GDP stagnated, the office said.

The euro rose to $1.2233 at 8:59 a.m. in Frankfurt from $1.2211 before the data were published.

D.Logistics AG, a German packaging and warehouse services provider, said Aug. 18 it swung to profit in the second quarter from a loss in the same period a year earlier as it lowered costs and boosted sales. German

The gain in domestic demand ``wasn't enough to counterbalance the drop in net exports, so that suggests there isn't substantial strength in the domestic economy yet,'' said Natascha Gewaltig, head of European economics at Action Economics in London. ``So far, growth has remained too weak to give a boost to employment.''

Unemployment, Oil

The jobless rate, which eased to 11.6 percent in July from 11.7 percent in June, remains near a postwar high of 12 percent reached in March. The decline in the euro from a record $1.3666 on Dec. 30 is also magnifying the impact of higher oil prices on companies and consumers.

Gasoline was 3.7 percent more expensive in July than in June and 7.7 percent dearer than a year earlier, the statistics office said Aug. 18. Deutsche Lufthansa AG's cargo unit, the world's second-largest freight airline, said yesterday it is raising fuel surcharges 11 percent, the second increase in six weeks.

The price of crude oil, which rose to a record of $67.10 a barrel on Aug. 12, was $65.91 in New York this morning.

The European Commission predicts German growth will slow to just 0.8 percent this year from 1.6 percent in 2004.

Still, factory orders surged 2.4 percent in June as companies including E.ON and Degussa AG, the world's biggest maker of specialty chemicals, invested in new facilities.

``German companies have become more competitive,'' said Andreas Rees, economist at HVB Group in Munich. ``Wage increases have been restrained and companies have reduced debt.''

Faster Growth

Euro-region growth will probably accelerate to about 0.4 percent in the current quarter and about 0.6 percent in the fourth from 0.3 percent in the three months through June, the Commission said Aug. 11. Italy's economy, Europe's fourth largest, grew at the fastest pace in more than four years in the second quarter, pulling the country out of recession. The Spanish and Dutch economies also expanded.

With growth showing signs of picking up, the ECB is resisting calls by politicians including German Economy and Labor Minister Wolfgang Clement to cut interest rates to shore up demand. The Frankfurt-based central bank said in its monthly report on Aug. 16 that its benchmark rate is ``appropriate'' at 2 percent and it ``expects that the euro-area economy will expand in a sustained, albeit gradual manner.''

Investors have reined back expectations for lower ECB rates, futures trading suggests. The rate on the December Euribor interest-rate future was at 2.15 percent today, up from 1.97 percent on June 27.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's launch in 1999. The Euribor three-month money market rate was 2.13 percent.



To contact the reporter on this story:
Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net.
Last Updated: 2005-08-23 03:09 EDT

Once upon a time there were three little pigs and the time came for them to leave home and seek their fortunes.

Before they left, their mother told them " Whatever you do , do it the best that you can because that's the way to get along in the world.


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The third little pig built his house out of bricks.

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But of course the wolf did blow the house in and ate the first little pig.

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The wolf then came to the house of bricks.

" Let me in , let me in" cried the wolf

"Or I'll huff and I'll puff till I blow your house in"

"Not by the hair of my chinny chin chin" said the pigs.

Well, the wolf huffed and puffed but he could not blow down that brick house.

But the wolf was a sly old wolf and he climbed up on the roof to look for a way into the brick house.




The little pig saw the wolf climb up on the roof and lit a roaring fire in the fireplace and placed on it a large kettle of water.

When the wolf finally found the hole in the chimney he crawled down and KERSPLASH right into that kettle of water and that was the end of his troubles with the big bad wolf.

The next day the little pig invited his mother over . She said "You see it is just as I told you. The way to get along in the world is to do things as well as you can." Fortunately for that little pig, he learned that lesson. And he just lived happily ever after!