German deficit hits 3 year low

Germany announced a drop in its public deficit to a three-year low on Thursday as the economy reaches pre-crisis levels and in stark contrast to the debt crisis overhanging the eurozone. The German public deficit dropped to 0.6 percent during the first half of the year, the lowest level since early 2008, Destatis, the federal office of statistics, said. This puts Germany -- which underwrites a large share of the eurozone's rescue packages -- well on its way to strengthening its finances even as European partners look to tighter austerity plans to balance their own books. Berlin expects a 1.5-percent public deficit for this year and hopes to break even in 2014. This improvement comes despite heavy government spending on stimulus programmes over the past two years to offset the worst recession since 1945. The latest deficit figure compares to a 3.1-percent deficit in the first half of 2010 and to a 5.4-percent deficit in the second half of 2010, according to Destatis. The lower deficit figure was due to a 6.0-percent increase in tax revenues compared to tax income in the same period last year, and to slower spending which increased by just 0.3 percent compared to expenditure in the first half of 2010, Destatis said. This compares to an overall 2010 deficit figure of 4.3 percent, up on previous estimates, because of the need to account for debts held by state-controlled "bad bank" Hypo Real Estate, Destatis said. However, other official data indicated that Germany's trade balance is paying the price for Berlin's recent decision to renounce nuclear energy. Destatis confirmed a meagre 0.1-percent expansion of the country's gross domestic product in the second quarter, suggesting this was partly due to increased electricity imports resulting from Germany's nuclear energy freeze. Exports were up 1.3 percent in the second quarter of this year, while imports increased 3.2 percent over the same period. "Germany's decision to abandon nuclear energy has had a noticeable impact" on imports, Destatis said. Angela Merkel's government ordered the immediate closure of the country's seven oldest nuclear reactors in the wake of Japan's massive March earthquake and tsunami which knocked out cooling systems at the Fukushima Daiichi nuclear plant, causing reactors to overheat and radiation to leak. This resulted in Germany becoming a net importer rather than exporter of electricity, Destatis said. The German parliament has voted to close all remaining nuclear plants over the coming decade. Meanwhile, private consumption, up by 0.2 percent, remained weak over the second quarter because of higher energy prices and concern over the global financial crisis, the statistics office also said. "A moderate negative growth contribution from net exports had been broadly expected, but the key negative surprise was an unexpectedly large decline in private consumption," according to Timo Klein, senior economist at IHS Global Insight. "It appears that the negative impact of rising inflation on consumer purchasing power and the escalating eurozone debt crisis led to a sudden buyers' strike during the second quarter," Klein said in a statement. Such anxiety was also reflected in a survey released on Thursday by the Ernst and Young financial services firm which suggested that most small and medium-size companies in Germany fear a worsening of the economic situation even though their own business remained healthy over the summer. About 45 percent of the 700 firms polled expect the economic situation to worsen, compared to 15 percent which expected an improvement. At the start of the year, 61 percent expressed optimism. Meanwhile, the government and the German central bank are still banking on economic growth of 3.0 percent this year.