Deepening recession

This is the fourth quarter in a row of falling gross domestic product (GDP), which is the basic measure of an economy's economic performance. In the last quarter, the economy shrank by 2.1 percent after two quarters of contracting by 0.5 percent.

The Federal Statistics Office says this is the strongest contraction Germany has seen since 1970, when it began tracking quarter-to-quarter growth. It is also the first time since reunification in 1990 that the German economy has experienced so many quarters of negative growth.

"This is a dramatic plunge," Juergen Michels, an economist at banking group Citigroup said. "And a worse start to the year than we could have imagined."

Governments and investors hope the worst of the first global recession since World War II may soon pass. This latest news, however, has confirmed that the situation remains dire. But some economists are still hopeful.

Not all doom and gloom

"It tells you that there was an unprecedented collapse in economic activity driven by the really unprecedented downward cycle of the global economy, which especially hurt industry," said Alexander Koch, an economist from multinational lender UniCredit.

"The latest ugly GDP figures should, however, mark the trough of the current 'Great Recession."

Koch said there have been reassuring reports for the coming months, "especially from business sentiment indicators and also the very surprising and very favourable strong rise in German new orders in March. This clearly indicates that the pace of recession will strongly decelerate in spring."

Stefan Muetze, an economist with Helaba, a bank based in the German states of Hessen and Thuringia, said measures taken to fight the recession - such as state stimulus packages and the lowering of interest rates - could still reverse the downward trend sooner than expected.

"If demand begins to edge upwards, then company finances will begin to replenish, he says. “This will have a flow-on effect and we could start to see moderate growth in the second half of 2009.”

Germany drags down euro zone

Germany accounts for about a third of the eurozone’s output, a big reason why the economy of the 16-nation bloc has also fallen into a deep slump - the worst since its records began in 1995.

Friday’s data showed the single-currency bloc contracted by 2.5 percent in this year’s first quarter and 4.6 percent over one year. The first quarter contraction was much worse than many economists had predicted and marked the dramatic turn for the worse that the European economy experienced at the start of the year.

Just a few days ago forecasts pointed to a decline of around 2 percent.

While Germany saw the deepest slump, Austria was not far behind with a drop of 2.8 percent and Italy with its 2.4 percent contraction in the first quarter. Meanwhile, Europe's second largest economy, France, also saw negative growth, sliding by 1.2 percent.

The greater 27-nation European Union saw its economy shrink by 2.5 percent.

While the economic meltdown may have originated in the United States, the eurozone contraction is now worse than in the US, where the economy shrank 1.6 percent in the first quarter. After the figures were announced the euro fell sharply against the dollar.

dfm/hf/AFP/AP/Reuters

Editor: Nancy Isenson/Trinity Hartman