Heavy investment spending was largely responsible for Germany’s stellar growth at the start of the year, and consumer spending – long the country's Achilles’ heel – seems to have been boosted by falling joblessness.
German gross domestic product leapt by 1.5 per cent in the first quarter – the fastest quarterly rate for almost 12 years. Employment in the period was 1.8 per cent higher than in the same quarter a year earlier.
But weaker forward-looking indicators and a warning from the financial services regulator could herald harder times for Europe’s largest economy.
Jochen Sanio, head of BaFin, the German regulator, said the financial crisis could worsen and spill into the real economy this year. He said there was a risk of “negative feedback” for the financial system if the real economy suffered.
His warning was supported by weaker forward-looking indicators such as the Ifo German business confidence index.
Even so, Mr Sanio said there were no signs of liquidity problems at any German bank. “All norms are being met,” he said.
The French economy also grew faster than expected in the first three months of the year, powered by a surge in exports. The rate of growth in the first quarter was 0.6 per cent, double the 0.3 per cent recorded for the last three months of 2007, and above economists’ consensus forecasts of 0.4 per cent.
Insee, the French statistical agency, also revised up its figure for gross domestic product growth last year from 1.9 per cent to 2.1 per cent. French exports increased by 3.1 per cent quarter-on-quarter in spite of a global downturn.
However, France’s public deficit for 2007 remained at 2.7 per cent, providing further evidence that the budgetary shortfall is structural rather than cyclical.
The European Commission is considering sending an “early warning” to the French government later this month that the deficit could come close to the EU’s 3 per cent limit this year and breach it in 2009.
President Nicolas Sarkozy’s government claimed credit for the robust performance of the eurozone’s second largest economy, arguing that growth had been propped up by tax cuts introduced in July worth €14bn ($21.6bn, £11bn) a year.
However, economists said that the breakdown of quarterly growth figures contained signs of a forthcoming slowdown.
“Household finances and spending took hard blows from accelerating prices and subsequent stagnating purchasing power,” Mathieu Kaiser, economist at BNP Paribas, said.
The pick-up in Germany and France contrasted with sharp deceleration in Spain, which on Wednesday reported its slowest quarterly pace of growth for 13 years. Spain has been hit by tumbling house prices and the ripple effects of the US subprime mortgage crisis.
Mr Sanio, who has said BaFin’s bailout of IKB helped avoid Germany’s worst banking crisis since the 1930s, rejected the idea that the regulator could have acted differently before the crisis to prevent banks from making risky investments. “I am not prepared to accept that any blame attaches to BaFin . . . or that we have not made use in some way of powers that we had,” he said.
