By Palash R. Ghosh: Subscribe to Palash's RSS feed
August 24, 2010 2:04 PM EDT
Germany's budget deficit climbed sharply to 3.5 percent of GDP, placing the company at risk of violating the European Union's (EU) rules which mandates a deficit of no more than 3 percent of GDP.
According to the Federal Statistical Office, net borrowing for the first six months of the year amounted to 42.8 billion euros -- more than double the 18.7 billion euro figure from a year ago.
In 2009, Germany sported a first-half deficit of just 1.5 percent.
The spike in deficit spending is primarily the result of the 50-billion euro stimulus package – the biggest since the end of World War II – that was announced last year by Chancellor Angela Merkel.
Last month, the government stated that it expected Germany's budget deficit in 2010 to amount to 4.5 percent of GDP, then falling below the 3 percent threshold by 2012, and dipping below 2 percent by 2013.
While German GDP soared 2.2 percent in the second quarter (having confirmed the preliminary numbers), the country's economy remains subject to the global economic slowdown.
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"With some time lag, the impact of the economic and financial crisis and of the relevant government measures taken to support the economy and the financial markets is clearly reflected now in the budgets of the central, state and local government as well as the social security funds," the statistical office said in a statement.
Alexander Koch, an economist at Unicredit, said an "imminent slowdown" in the global economy will hurt German exports in the second half of the year, but he still expects the country to post a solid 3.5 percent GDP advance for the year.
"Even if the extent of the moderation in the growth dynamic is exceptionally uncertain, considering the latest still very expansionary business activity readings, the broad-based upswing of the German economy is likely to continue at a still decent pace in the short term," he said.
Jennifer McKeown, senior European economist at Capital Economics in London, concurs that German export growth looks set to slow sharply.
“It has already risen further than global demand alone would have warranted, presumably thanks to the euro’s decline,” she noted.
“The currency might well depreciate further, but the recent drop in surveys of export orders suggests that this boost will be offset by a slowdown in global demand.”
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