German economy barely grew

Chancellor Gerhard Schroeder goes to polls as economic picture remains gloomy

FRANKFURT, Germany -- The German economy grew a modest quarter of a percent in the second quarter, the Bundesbank said, but warned Europe's biggest economy remains vulnerable to shocks.

Gross domestic product rose 0.25 percent in the months of April, May and June, barely above the 0.2 percent rise in the first three months of this year. Economist at Bear Stearns said the market had been looking for growth of 0.3 percent.

The central bank said in its August monthly report the economy had still not passed the early stages of a recovery.

"As long as the economy has not yet gained strength or dynamism, it remains vulnerable to new shocks, be they external or home made," the Bundesbank said.

Unemployment in Germany is at a three-year high, business confidence among top companies is fading as the economy stumbles to recover from a recession. The country's leading stocks market index, the Xetra Dax, has fallen by almost 30 percent further hurting consumer and business confidence.

"The fall in share markets, if it continues, could weigh on global growth,'' the Bundesbank said.

MORE STORIES • German business climate darkens  • German jobless rises to three-year high  • Germany hit by construction strike  • German Post may cut 10,000 jobs

The latest numbers are unlikely to help Chancellor Gerhard Schroeder's attempts to be reelected in September. He came into office with the pledge to bring the jobless number below four million. (Full story)

Economists were pessimistic about the latest figures and the potential impact for the rest of the year.

"By German standards this is relatively good but by recovery standards this is mild," Sharon Coombs, economist at HSBC, told CNN.

Coombs said the financial and economic cost of the worst floods in more than a century are not clear but there is a possibility that this could lead to stronger growth as the country rebuilds bridges, homes and river defenses.

The Bundesbank said strikes in construction and some industrial sectors had hurt the economy. But the recent euro rise versus the dollar has had little effect on Germany's strong competitive position up to now, while the effect of cheaper imports in Germany was much larger than that of higher export prices.

"Experience shows that the rate of global economic growth has a more decisive impact on German export growth,'' the bank said.

The euro's strength also helped weak domestic demand by boosting consumer spending power and lowering costs for companies.