Germany's economy shrank 0.2% in the last three months of 2004, upsetting hopes of a sustained recovery. The figures confounded hopes of a 0.2% expansion in the fourth quarter in Europe's biggest economy. The Federal Statistics Office said growth for the whole of 2004 was 1.6%, after a year of contraction in 2003, down from an earlier estimate of 1.7%. It said growth in the third quarter had been zero, putting the economy at a standstill from July onward.Germany has been reliant on exports to get its economy back on track, as unemployment of more than five million and impending cuts to welfare mean German consumers have kept their money to themselves. Major companies including Volkswagen, DaimlerChrysler and Siemens have spent much of 2004 in tough talks with unions about trimming jobs and costs. According to the statistics office, Destatis, rising exports were outweighed in the fourth quarter by the continuing weakness of domestic demand.
But the relentless rise in the value of the euro last year has also hit the competitiveness of German products overseas. The effect has been to depress prospects for the 12-nation eurozone as a whole, as well as Germany. Eurozone interest rates are at 2%, but senior officials at the rate-setting European Central Bank are beginning to talk about the threat of inflation, prompting fears that interest rates may rise. The ECB's mandate is to fight rising prices by boosting interest rates - and that could further threaten Germany's hopes of recovery.