BERLIN, GERMANY - GERMANY'S economy contracted for the first time for nearly four years in the second quarter of 2008, data showed on Thursday, as demand for its exports fell and inflation hit consumer confidence.

The German economy, which accounts for about a third of eurozone output, shrank by 0.5 per cent compared to performance in the first three months of the year, the statistics office said.

The reading for growth in the first quarter was also revised downwards to 1.3 per cent from the office's earlier estimate of 1.5 per cent.

The figures 'point to real economic difficulties ahead,' Commerzbank economist Joerg Kraemer said.

'The leading indicators have meanwhile fallen sharply, suggesting that a hard landing is on the cards - although not as severe as in Spain or the UK,' Kraemer said.

A string of recent data and sentiment indicators meant that economists had been fully expecting Germany's gross domestic product to have pulled back in the second quarter, and in fact many were expecting an even larger contraction.

Economists polled by Dow Jones Newswires expected on average GDP to have fallen back 0.7 per cent. Last week a figure of minus one per cent was even doing the rounds.

The last time German output fell back was in the third quarter of 2004, when it shrank 0.2 per cent.

Figures also out on Thursday confirmed that inflation in Germany hit a 15-year-high of 3.3 per cent high in July, driven by rampant energy and food prices.

The two sets of data illustrate the dilemma facing the European Central Bank. In order to keep a lid on inflation it cannot risk lowering interest rates, but high borrowing costs in turn put a lid on economic growth. -- AFP

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