Germany's Economy Hit by Rising Euro as Government Trims 2013 Forecast

Germany has cut its full-year growth forecast by more than half as exports slow and trade takes its toll on the region's largest economy.

Exports will slow to a 2.8 percent pace this year, the Economy Ministry said in a statement published on its website Wednesday, against a 3.5 percent gain in imports that will likely trim around 0.1 percent from German GDP this year, which the Ministry estimates will grow by 0.4 percent - less than half the 1 percent expansion it had previously published. The figures come less than a day after Eurogroup President Jean-Claude Juncker warned that a "dangerously high" euro is threatening the region's recovery prospects.

"The Eurozone has become more stable after lots of efforts," said the outgoing Juncker during a speech to business leaders in Luxembourg, adding that while the potential for a break-up of the single currency had largely disappeared, "the euro foreign-exchange rate is dangerously high" and will impact growth in the coming months.

That view, however, was broadly contradicted by Germany's Economy Minister, Philipp Roesler, who told reporters at a press conference in Berlin that "(the German government) absolutely don't see things that way", adding that while market interest rates may rise this year as a result of the taming of the debt crisis, he isn't worried about persistent euro strength.

Germany paid a slightly higher cost on its latest debt market auction - a €4bn sale of benchmark 10 year notes that carry a 1.5 percent coupon - but drew nearly €6.6bn in bids, around 1.7 times more than were available for sale. That compares to a so-called bid-to-cover ratio of 1.5 times in December and a 2012 average of 1.39 times.

The Federal Statistic Office said Tuesday that Germany GDP shrank by 0.5 percent in the final three months of 2012 and 0.7 percent for the full year. Exports, the Office said, grew at 4.1 percent annual pace - compared to 7.8 percent in 2011.

The slowdown reflects both the deepening recession inside the Eurozone - the destination for the bulk of German exports - and the surging value of the euro, which has risen more than 8 percent against the US dollar over the past six months.

Economists at Barclays, however, suggest the trade impact has been overstated and that falling fixed investment (down 2 percent overall and more than 4 percent for equipment and machinery) and business de-stocking took around 0.5 percent from German GDP last year.

"The crisis seems to have had a stronger negative effect on the German economy through the confidence channel and investment than through direct trade channels and weaker demand from other member states," said Barclays' economist Thomas Harjes in a research note. "we therefore still expect the German economy to recover swiftly in 2013 on the back of stronger global demand and rising investments as confidence in the corporate sector gradually returns given that the perceived risk of a euro area breakup has greatly diminished."