RTTNews - The German economy contracted more than expected to show the biggest contraction since records began in 1970, as the worst global recession since the Second World War took its toll on the country's exports and labor market.

Data released by the Federal Statistical office showed that gross domestic product or GDP dropped 3.8% quarter-on-quarter in the first three months of the year after falling a revised 2.2% in the fourth quarter. GDP was forecast to fall 3% in the first quarter. Thus, the economy extended its contraction that begun in the second quarter of 2008.

The uncertainty caused by the Lehman collapse has come down and Q2 GDP should decline by less than in Q1, Commerzbank analyst Jörg Krämer said. Commerzbank expects the second quarter GDP to decline by 0.5%-1% over the first quarter.

According to the statistical office, GDP fell mainly due to decreases in exports and in capital formation. Investment was considerably lower in the first quarter than in the previous three months as firms were highly pessimistic regarding the economic conditions. A slight increase was recorded by household and government final consumption expenditure.

Compared with the first quarter of 2008, the price-adjusted GDP was down 6.7% in the first quarter following a revised 1.7% contraction in the fourth quarter. Meanwhile, the decline was worse than the 6.5% drop expected by economists.

When adjusted for the calendar, the GDP decreased 6.9% because in the reference quarter 0.6 working days more were available than in the same period of the previous year. Economists have expected the economy to contract 6% after shrinking a revised 1.8% in the previous quarter. The statistical office will release detailed results on May 26.

Chancellor Angela Merkel's government, which faces election in September 2009, has lowered its forecast for the economy to show a 6% contraction this year from an earlier estimate of 2.25% fall. The government sees a recovery in 2010, with the government estimates pitching the growth at 0.5%. Meanwhile, the International Monetary Fund expects a 5.6% contraction in 2009 and a further 1% decline in 2010 for the largest Eurozone economy.

The government has increased its spending and the European Central Bank has lowered its borrowing rates to prevent the economy from falling further into recession.

The European Commission forecasts a contraction of 5.4% for 2009. The commission projects a recovery with a real GDP growth of around 0.3% in 2010.

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