German growth stagnant

November 19, 2001 Posted: 1424 GMT

LONDON (CNN) -- The German economy, Europe's largest, remained stagnant in the third quarter due to the September 11 terror attacks in the U.S, the country's central bank reported.

"Economic growth, whose expansion already in the spring had come to a standstill, remained largely at the same level in the summer," the Bundesbank wrote in its November monthly report.

Both the direct and indirect psychological effects of September's attacks sent a further chill through the already cooling world economy but there were prospects for recovery in 2002.

Growth in Germany has been sluggish for a year as the world economy cooled but the slowdown worsened after the September 11 attacks, which heightened uncertainty among businesses and households and delayed purchasing decisions.

Germany's public sector deficit may widen to around 2.5 percent of gross domestic product this year from 1.3 percent last year as tax cuts and firms' lower profits drain public coffers.

But while the slowdown had hit confidence and orders, it had so far had only limited effects on the labour market. And falling inflation rates were a positive sign, the report said.

The central bank said its initial calculations showed that growth in the third quarter should almost have held the level reached in the second -- when output was unchanged -- on a seasonally adjusted basis.

Many economists predict the economy will contract in the fourth quarter and remain weak in early 2002, reflecting the ongoing impact of the attacks on confidence and output, Reuters said.

German GDP rose by only about 1/4 percent year-on-year in the third quarter when adjusted for seasonal and calendar effects after slightly more than 1/2 percent growth in the second quarter, the Bundesbank report said.

For the first nine months of 2001, the economy grew by about 3/4 percent compared with the same period last year, it added.

The German government's official target is for growth this year to be around 0.75 percent.

The Bundesbank said the price climate in Germany is continuing to improve, with the annual consumer inflation rate slipping to 2.0 percent in October, compared with 3.2 percent in the second quarter.