German growth disappoints markets

INVESTORS endured a further session of volatile trading yesterday as weak German economic growth figures and anxieties over Europe’s debt crisis made London’s stock exchange lurch between large falls and modest gains.

In London, the FTSE 100 index closed up just 7.05 points at 5,357.63 having plunged by 1.6 per cent to hit a low of 5,265.83 earlier in the session during a topsy-turvy day for equities.

All eyes will today be on how investors react to last night’s news that German chancellor Angela Merkel and French president Nicolas Sarkozy want a “true European economic government” to oversee the 17-nation zone.

But as they awaited news from crunch talks in Paris yesterday, traders were spooked by eurozone gross domestic product (GDP) data, which showed the German economy expanded by only 0.1 per cent in the second quarter, compared with 1.3 per cent expansion during the first three months of the year.

Total eurozone GDP growth slowed to 0.2 per cent in the second quarter from 0.8 per cent previously.

Michael Hewson, market analyst at CMC Markets, said: “If peripheral countries like Spain, Italy were hoping Germany was going to help save them from their debt nightmare with powerful growth, these GDP numbers put paid to that illusion.”

Azad Zangana, Schroders’ European economist, added: “Given the current slowdown and the increasing likelihood that the annual inflation rate may be about to reach its peak, the European Central Bank [ECB] may decide to postpone its decision to raise interest rates back to more normal levels.”

Investors were buoyed towards the end of the day by ratings agency Fitch reaffirming its triple “A” rating for the US economy, just days after a downgrade from rival Standard & Poor’s sparked a bloodbath on world markets.

In further good news for the world’s largest economy, US production jumped 0.9 per cent in July, which was above analysts’ consensus expectations.

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